Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

    The components of the Company’s income tax provision (benefit) are as follows (in thousands):

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	(119)	$	—	$	—
State	262		88		15
Total current provision	143		88		15
Deferred:
Federal	43		(60)		(1,118)
State	20		(34)		(218)
Total deferred provision (benefit)	63		(94)		(1,336)
Total income tax provision (benefit)	$	206	$	(6)	$	(1,321)

The 2021 income tax expense of $0.2 million primarily reflects state income taxes and the amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets.

    The 2020 income tax benefit of less than $0.1 million primarily arose in connection with the impairment of goodwill, resulting in reduction of indefinite-lived deferred tax liabilities.

    The 2019 income tax benefit of $1.3 million primarily reflects the required allocation of income taxes between continuing operations and discontinued operations as prescribed by ASC 740. While the tax effect of income (loss) before income taxes generally should be computed without regard to the tax effects of income (loss) before income taxes from the other categories, an exception applies when there is a pre-tax loss from continuing operations and pre-tax income from those other categories. This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year.

    The overall effective income tax rate differs from the statutory federal rate as follows:

	Year Ended December 31,
	2021		2020		2019
Income tax benefit based on the federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	4.4		35.7		(2.1)
Nondeductible expenses	3.2		(3.2)		(3.1)
Change in valuation allowance	2.4		(49.9)		(3.1)
Stock-based compensation	(8.6)		(23.2)		(10.5)
Research and development tax credits	(20.1)		25.1		—
Uncertain tax positions	(2.8)		—		—
Goodwill impairment	—		(5.5)		—
Overall effective income tax rate	(0.5)	%	—	%	2.2	%

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

	December 31,
	2021		2020
Deferred income tax assets:
Net operating loss carryforwards	$	77,634	$	70,828
Stock-based compensation	6,550		9,406
Accrued expenses	914		1,861
Research and development tax credits	6,405		13,421
Operating leases liabilities	7,662		9,026
Intangible assets and goodwill	1,205		1,405
Other	1,176		3
Gross deferred tax assets	101,546		105,950
Valuation allowance	(94,117)		(95,042)
Net deferred tax assets	7,429		10,908
Deferred tax liabilities:
Property, equipment and software	(1,363)		(1,934)
Capitalized commissions	(427)		(578)
§481(a) Adjustment - ASC 606	—		(186)
Operating lease assets	(5,742)		(7,097)
Contingent consideration from divestiture	—		(1,153)
Gross deferred tax liabilities	(7,532)		(10,948)
Total net deferred tax liabilities	$	(103)	$	(40)

The net deferred tax liability at December 31, 2021 and 2020 relates to amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets. Accordingly, the net deferred tax liability does not reduce the need for a valuation allowance related to the Company’s net deferred tax assets.

At December 31, 2021, the Company had federal and state net operating loss carryforwards of $301.4 million and $236.0 million, respectively. Of the Company’s federal net operating loss carryforwards, $248.2 million will begin to expire in 2034 and $53.2 million does not expire. The Company’s state net operating loss carryforwards will begin to expire in 2022. At December 31, 2021, the Company had federal and state research and development tax credit carryforwards of approximately $13.4 million and $11.0 million, respectively. The federal tax credit carryforwards begin to expire in the year ending December 31, 2028. The state tax credit carryforwards can be carried forward indefinitely.

The Internal Revenue Code of 1986, as amended (the “IRC”), imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be limited as prescribed under IRC Sections 382 and 383. Events that may cause a limitation in the amount of the net operating losses and credits that the Company uses in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The Company experienced a cumulative ownership change as of December 31, 2019. The Company estimates that up to $15.2 million and $0.5 million of federal and state net operating loss carryforwards, respectively, may expire unused. The Section 382 limitation resulted in a reduction of deferred tax assets of $3.2 million as of December 31, 2020 and was fully offset by a corresponding decrease in the Company’s valuation allowance, with no net tax provision impact. Additionally, with the finalization of the 2011 - 2020 research and development tax credit study in 2021, the Company anticipates that certain of the federal research and development credit carryforwards may expire unused. The Section 383 limitation resulted in a reduction of deferred tax assets of $12.3 million as of December 31, 2021 and was fully offset by a corresponding decrease in valuation allowance, with no net tax provision impact.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation, at December 31, 2021, a valuation allowance of $94.1 million has been recorded since it is more likely than not that the deferred tax assets will not be realized.

    The change in the valuation allowance for the years ended December 31, 2021, 2020, and 2019 is as follows (in thousands):

	Year Ended December 31,
	2021		2020		2019
Valuation allowance, at beginning of year	$	95,042	$	111,193	$	109,625
Decrease in valuation allowance - operating lease impact	—		—		(915)
Valuation allowance, at beginning of year, as adjusted	$	95,042	$	111,193	$	108,710
Increase in valuation allowance	—		—		2,483
Decrease in valuation allowance	(925)		(16,151)		—
Valuation allowance, at end of year	$	94,117	$	95,042	$	111,193

    The $0.9 million decrease in valuation allowance is primarily related to the reduction of deferred tax assets for federal research and development tax credits and tax impacts of stock based compensation, offset by the increase in deferred tax assets for net operating losses and the impairment charge to the Company’s equity investment in Accu-Trade.

    The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):

	Year Ended December 31,
	2021		2020		2019
Unrecognized tax benefit, beginning of year	$	7,640	$	(3)	$	(3)
Increase (decrease) based on tax positions in prior period	(3,504)		1,447		—
Increase based on tax positions in current period	1,101		6,196		—
Unrecognized tax benefit, end of year	$	5,237	$	7,640	$	(3)

The December 31, 2021, 2020, and 2019 balances include tax benefits of $3.3 million, $7.6 million, and less than $0.1 million, respectively, which if recognized, would be in the form of net operating loss or tax credit carryforwards and require a full valuation allowance based on present circumstances. These amounts are net of offsetting benefits from other tax jurisdictions.

The $3.5 million decrease in the prior period unrecognized tax benefit is primarily related to the reduction of research and development tax credits in accordance with Section 383. The $1.1 million increase in the current period unrecognized tax benefit is primarily related to bonus expense that does not qualify as a federal income tax deduction when accrued for financial reporting purposes. The Company expects the amount of unrecognized tax benefits to decrease by $1.1 million in the next 12 months as a result of proposed filing of application for a change in accounting method with the filing of the tax return.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions, if any, in the income tax provision. At December 31, 2021, no interest and penalties related to uncertain tax positions have been accrued.

The Company is subject to United States federal and state taxation. Due to the presence of net operating loss carryforwards, all income tax years remain open for examination by the Internal Revenue Service and various state taxing authorities. The Company is not currently under Internal Revenue Service or state tax examination.