Income Tax

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Tax

8. Income Tax

Pretax losses were generated by both domestic and foreign operations as follows (in thousands):

	Years Ended December 31,
	2021			2020			2019
United States	$	(33,316	)	$	(15,950	)	$	(23,315	)
Foreign		(458	)		(280	)		(448	)
Worldwide pre-tax loss	$	(33,774	)	$	(16,230	)	$	(23,763	)

For the years ended December 31, 2021, 2020, and 2019, we did not record a provision for income taxes due to a full valuation allowance against our deferred taxes. A reconciliation of the expected statutory federal income tax provision to the actual income tax provision is summarized as follows (in thousands):

	Years Ended December 31,
	2021			2020			2019
Expected income taxes benefit at federal statutory rate	$	(7,093	)	$	(3,408	)	$	(4,990	)
State income taxes, net of federal benefit		(2,313	)		(12	)		(19	)
Permanent items and other		592			169			49
Stock compensation		90			804			701
Research credits		(1,253	)		(835	)		(817	)
Unrecognized tax benefits		500			334			327
Foreign rate differential		21			13			20
Change in tax rate		52			(7	)		(49	)
Change in valuation allowance		9,404			2,942			4,778
Income tax (benefit) expense	$	—		$	—		$	—

Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial and tax reporting purposes. The deferred tax assets consisted primarily of the income tax benefits from net operating loss (NOL) carryforwards, research and development credits and capitalized research and development expenses, along with other accruals and reserves. Valuation allowances of $84.1 million and $74.6 million as of December 31, 2021 and 2020, respectively, have been recorded to offset deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold under ASC 740, Accounting for Income Taxes.

Significant components of our deferred tax assets are summarized as follows (in thousands):

	December 31,
	2021			2020
Deferred tax assets:
Net operating loss carryforwards	$	48,833		$	41,203
Capitalized research and development expenses		18,086			17,007
Research credits and other state credits		13,695			12,954
Intangible assets		1,465			1,655
Reserve and accruals		641			544
Share-based compensation expense		1,369			1,253
Lease liability		290			472
Valuation allowance		(84,112	)		(74,646	)
Total deferred tax assets	$	267		$	442
Deferred tax liabilities:
Right of use lease assets		(267	)		(442	)
Total deferred tax liabilities		(267	)		(442	)
Net deferred tax assets	$	—		$	—

As of December 31, 2021, we had federal NOL carryforwards of approximately $204.5 million, with $92.0 million of NOLs generated after December 31, 2017 carrying forward indefinitely and $112.5 million of NOLs that will begin to expire in 2025. NOLs generated after January 1, 2018 are subject to an 80% of taxable income limitation when utilized after December 31, 2020 in accordance with the Tax Cuts and Jobs Act of 2017 as modified by the Coronavirus Aid, Relief and Economic Security Act (CARES Act). We had state net operating loss carryforwards of approximately $192.0 million, and foreign net operating loss carryforwards of $8.7 million. The state net operating losses will begin to expire in 2021. The foreign net operating losses carry over indefinitely.

As of December 31, 2021, we had federal and state research and development credit carryforwards of approximately $6.5 million and $4.8 million, respectively, which begin to expire in 2026 for federal purposes and carry over indefinitely for state purposes. We had $12.5 million of federal Orphan Drug Credits as of December 31, 2021, which will begin to expire in 2035.

Utilization of the domestic NOL and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. Since the Company’s formation, we raised capital through the issuance of capital stock on several occasions which on its own or combined with the purchasing stockholders’ subsequent disposition of those shares, has resulted in such an ownership change, and could result in an ownership change in the future.

Upon the occurrence of an ownership change under Section 382 as outlined above, utilization of the NOL and research and development credit carryforwards become subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term, tax-exempt rate, which could be subject to additional adjustments. Any limitation may result in expiration of a portion of our NOL or research and development credit carryforwards before utilization. Due to the existence of the valuation allowance, any impact to the NOL and research and development tax credit carryforwards from Section 382 analysis will be offset by a corresponding adjustment to valuation allowance, resulting in no tax provision impact.

We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

Our practice is to recognize interest and penalties related to income tax matters in income tax expense. We had no accrual for interest and penalties on our balance sheet and had not recognized interest or penalties in the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019.

Due to the existence of the valuation allowance, future changes in unrecognized tax benefits will not impact our effective tax rate.

Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.

The activity related to our unrecognized tax benefits is summarized as follows (in thousands):

	December 31,
	2021			2020		2019
Balance as of beginning of year	$	21,707		$	21,302	$	19,643
Increase (decrease) related to prior year tax positions		(9	)		3		—
Increase related to current year tax positions		534			402		1,659
Balance as of end of year	$	22,232		$	21,707	$	21,302

We do not anticipate that the amount of unrecognized tax benefits as of December 31, 2021 will change within the next twelve months.

We are subject to taxation in the United States, Hong Kong and state jurisdictions. Our tax years from inception are subject to examination by the United States, Hong Kong and California authorities due to carry forward of unutilized NOLs and research and development credits.