Income Taxes

12 Months Ended

Dec. 31, 2019

Income TaxesFor the years ended December 31, 2019 and 2018, the Company did not recognize any current or deferred income tax expense or benefit due to the current and historical losses incurred by the Company. Losses before income taxes were $20.2 million and $18.2 million for the years ended December 31, 2019 and 2018, respectively, substantially all of which were incurred in the United States.

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are comprised of the following:


	As of December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	31,575,288	$	6,864,360
Capital loss carryforwards	7,298,052		—
Start-up costs	11,234,751		—
Accruals and reserves	166,611		35,645
Intellectual property amortization	555,352		121,694
Stock-based compensation expense	1,123,100		993,234
Convertible debt	—		498,236
Tax credits	1,926,677		548,399
Lease liability	96,895		—
Total deferred tax assets	53,976,726		9,061,568
Valuation allowance	(53,877,168)		(9,061,568)
Deferred tax assets, net of allowance	$	99,558	$	—

Deferred tax liabilities:
Lease ROU asset	(99,558)		—
Net deferred tax assets	$	—	$	—

As of December 31, 2019 and 2018, the Company had U.S. federal net operating loss ("NOL") carryforwards of $113.6 million and $23.7 million, respectively, which may be available to offset future income tax liabilities. The Tax Cut and Jobs Act, which was enacted in December 2017, will generally allow federal losses generated after 2017 to be carried over indefinitely, but will generally limit the NOL deduction to the lesser of the NOL carryover or 80% of a corporation’s taxable income. In addition, there will be no carryback for losses generated after 2017. Losses generated prior to 2018 will generally be deductible to the extent of the lesser of a corporation’s NOL carryover or 100% of a corporation’s taxable income and be available for twenty years from the period the loss was generated. The Company has federal NOLs generated after 2017 of $61.2 million, which do not expire. The federal NOLs generated prior to 2018 of $52.4 million will expire at various dates through 2037.

As of December 31, 2019 and 2018, the Company also had U.S. state NOL carryforwards of $112.4 million and $23.7 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2039.

As of December 31, 2019 and 2018, the Company has federal tax credit carryforwards of approximately $1.6 million and $0.8 million, respectively, which are available to offset future federal tax liabilities which expire at various dates through 2039. As of December 31, 2019 and 2018, the Company has state tax credit carryforwards of approximately $0.4 million and $0.1 million, respectively, which are available to reduce future tax liabilities which expire at various dates through 2034.

The Company has recorded a full valuation allowance against its net deferred tax assets as of December 31, 2019 and 2018 because the Company has determined that is it more likely than not that these assets will not be fully realized due to the Company's history of operating losses and lack of available evidence supporting future taxable income. The Company experienced a net change in valuation allowance of $44.8 million during the year ended December 31, 2019, primarily related to the increase in NOL carryforwards. The increase in the federal and state NOL carryforwards during the year ended December 31, 2019 was primarily due to the acquired NOL carryforwards as a result of the Merger.

Under the provisions of the IRC, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Utilization of U.S. federal and state operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax liabilities, respectively. The Company acquired a significant amount of federal and state NOL carryforwards and federal and state tax credit carryforwards as a result of the Merger. The Company

has not yet conducted a comprehensive study to assess whether a change of ownership has occurred, or whether there have been multiple ownership changes since its formation. Any limitation may result in expiration of a portion of the NOL carryforward or tax credit carryforwards before utilization, which would be offset by a change in the Company's valuation allowance. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.

The reconciliation of federal statutory income tax to the Company's provision for income taxes is as follows:


	As of December 31,
	2019		2018
Expected provision at statutory rate	21.0	%	21.0	%
State tax - net of federal benefit	5.3	%	7.6	%
Research and development credits	3.2	%	2.1	%
Permanent differences	(8.1)	%	(0.8)	%
Other	2.9	%	0.0	%
Change in valuation allowance	(24.3)	%	(29.9)	%
Total provision for income taxes	—	%	—	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	Amount
Gross unrecognized tax benefits as of December 31, 2018	$	—
Additions for tax positions taken in a prior year	303,050
Additions for tax positions taken in the current year	—
Reductions for tax positions taken in the prior year due to settlement	—
Reductions for tax positions taken in the prior year due to statutes lapsing	—
Gross unrecognized tax benefits as of December 31, 2019	$	303,050

The uncertain tax positions giving rise to the unrecognized tax benefits of $0.3 million at December 31, 2019 relate to the timing of certain income and deductions for federal income tax purposes taken by Histogenics prior to the Merger. The reversal of unrecognized tax benefits would not have any impact on the effective tax rate in future periods and is not expected to create cash tax liability.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In a normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company’s tax years are still open under status from 2016 to present.