Cartesian Therapeutics, Inc. - 10-K filing on 2022-03-10

Income Taxes

12 Months Ended

Dec. 31, 2021

The Company provides for income taxes under ASC 740. Under ASC 740, the Company provides deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse.

On June 11, 2020, the Company entered into the Sobi License (see note 12). In September 2020, Sobi paid the Company a one-time upfront payment of $75.0 million. Sobi has also agreed to make milestone payments totaling up to $630.0 million to the Company upon achievement of various development and regulatory milestones and sales thresholds for annual net sales of SEL-212, and tiered royalty payments ranging from low double digits on the lowest sales tier to high teens on the highest sales tier.

For income tax purposes, the transfer of trademark and product rights is treated as a sale and the net proceeds from the sale are taxed under the default installment method as cash is received by the Company. During the year ending December 31, 2021, the Company completed an analysis of future tax obligations under the default installment sale method versus making a timely filed election on its 2020 tax return due October 15, 2021 to elect out of the installment sale method for income tax purposes. As a result, the Company elected out of the default installment sale treatment with the filing of its tax return. In the elect out method, the Company was taxed based upon the estimated fair value of all present and future proceeds from the sale and the Company utilized all of its available net operating losses and income tax credits, which served to reduce the federal and state tax liability. As the Company recognizes future revenue under the Sobi license for US GAAP purposes, the Company will exclude that revenue from taxable income.

For the year ended December 31, 2021, the Company recognized a current tax expense of $16.0 million, inclusive of estimated penalties and interest of $1.3 million. For the years ended December 31, 2020 and 2019, the Company did not record a current or deferred income tax expense or benefit. The following table reconciles the federal statutory income rate to the Company’s effective income tax rate:


	Year Ended December 31,
	2021		2020		2019
Statutory U.S. federal rate	21.0	%	21.0	%	21.0	%
State income taxes - net of federal benefit	(166.0	%)	5.8	%	6.3	%
Permanent items	8.3	%	(2.9	%)	(2.1	%)
Research tax credits	55.0	%	1.0	%	1.1	%
Deferred revenue	156.5	%	—	%	—	%
Other	(3.7	%)	—	%	—	%
Valuation allowance, net	(230.1	%)	(23.6	%)	(26.3	%)
Stock compensation	(5.2	%)	(1.3	%)	—	%
Effective income tax rate	(164.2	%)	—	%	—	%

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets are as follows (in thousands):


	Year Ended December 31,
	2021		2020
Deferred Tax Assets
Net operating loss carryforwards	$	13,932	$	63,678
Research and development credits	1,426		7,632
Stock-based compensations expense	3,955		2,919
Other expenses	745		788
Deferred revenue	102,583		26,699
Operating lease liability	2,636		2,884
Patent costs/amortization	6,843		5,379
Gross deferred tax assets	132,120		109,979

Deferred Tax Liabilities
Depreciation	$	(90)	$	(11)
Operating lease right-of-use asset	(2,685)		(2,991)
Gross deferred tax liabilities	(2,775)		(3,002)
Net deferred tax assets before valuation allowance	129,345		106,977
Valuation allowance	(129,345)		(106,977)
Net deferred tax assets	$	—	$	—

The Company has provided a full valuation allowance against its net deferred tax assets, as the Company believes that it is more likely than not that the deferred tax assets will not be realized.

Realization of future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and concluded that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. The valuation allowance increased by $22.4 million and $16.3 million for the years ended December 31, 2021, and 2020, respectively, primarily as a result of an increase in deferred revenue. In 2014, the Company’s Russian subsidiary was granted a 10 year tax holiday in Russia. The Company’s foreign operations continue to benefit from the tax holiday, which is set to expire on December 31, 2023, however the Company is in the process of closing down operations in Russia and does not expect any tax liability.

At December 31, 2021, the Company has federal and state net operating loss carryforwards of $51.1 million and $50.8 million, respectively, which will expire at various times through 2041. Of the federal net operating losses, $51.1 million can be carried forward indefinitely but will be subject to an 80% limitation. The Company has $1.2 million and $0.3 million, respectively, of federal and state research and development tax credit carryforwards, which will expire at various times through 2041. Utilization of the NOL 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 could occur in the future.

These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. If the Company experiences a change of control, as defined by Section 382 of the Code and similar state law, utilization of the NOL 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 NOL carryforwards or research and orphan drug credit carryforwards before utilization. The Company performed an analysis of ownership changes through December 31, 2021. Based on this analysis, the Company does not believe that any of its tax attributes through December 31, 2021 will expire unutilized due to Section 382 limitations.

The Company applies ASC 740, Income Taxes to uncertain tax positions. As of the adoption date on January 1, 2010 and through December 31, 2021, the Company had no unrecognized tax benefits or related interest and penalties accrued.

During 2021, the Company completed a detailed study of its research and development and orphan drug credits through December 31, 2020. As a result, the Company adjusted its current tax payable and deferred tax asset balances and the impacts are included in the federal research and orphan drug credit and state income taxes lines in the effective rate reconciliation above.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statement of operations. As of December 31, 2021, the Company had no accrued interest related to uncertain tax positions.

The statute of limitations for assessment by the Internal Revenue Service and Massachusetts tax authorities is open for tax years since inception as the Company claimed research tax credits on its 2020 tax return which remains open for examination for the 2020 year as well as for any year in which a credit has been claimed for. The Company files income tax returns in the United States and Massachusetts. There are currently no federal, state or foreign audits in progress.