Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The income tax provision for the years ended December 31, 2021 and 2020 was immaterial. The effective tax rate was 0% for the years ended December 31, 2021 and 2020 and differs from the statutory federal income tax rate due to the deferred tax assets being subject to a full valuation allowance.

The provision (benefit) for income taxes charged to operations was as follows:

	2021		2020
	(in thousands)
Current tax expense
U.S. federal	$	—	$	—
State and local		2		2
Total current		2		2
Deferred tax expense:
U.S. federal	$	—	$	—
State and local		—		—
Total deferred		—		—
Total provision for income taxes	$	2	$	2

Pursuant to Internal Revenue Code ("IRC") Sections 382 and 383 as well as similar state provisions, annual use of the Company’s net operating loss and R&D credit carryforwards may be limited in the event a cumulative change in ownership. In general, an “ownership change,” as defined by IRC Section 382, 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 or public groups. The Company has not completed an IRC Sections 382 and 383 analysis regarding the limitation of net operating loss and R&D credit carryforwards as of December 31, 2021. The Company has not completed a formal R&D study but has estimated the federal and California credit for purposes of the tax footnote as of December 31, 2021. However, the Company has not reflected a benefit in the consolidated financial statements due to the recorded valuation allowance.

A reconciliation of the provision for income taxes with the expected income tax computed by applying the statutory federal income tax rate to loss before provision for income taxes and a reconciliation of the statutory federal rate and the effective rate was calculated as follows:

	Year Ended December 31,
	2021			2020
Tax computed at federal statutory rate		21.00	%		21.00	%
State income tax - net of federal benefit		3.31	%		3.01	%
Tax credits		1.13	%		1.44	%
Change in valuation allowance		(25.51	)%		(26.65	)%
Stock-based compensation		(0.20	)%		(0.22	)%
Other deferred adjustments		0.56	%		1.51	%
Permanent items		(0.29	)%		(0.09	)%
Income tax provision		0.00	%		0.00	%

The significant components that comprised the Company’s net deferred taxes at December 31, 2021 and 2020 are as follows:

	2021			2020
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	70,731		$	60,260
Fixed assets and intangible assets		1,449			1,507
Lease liabilities		660			783
Accruals and reserves		1,178			1,349
Stock-based compensation		864			410
Tax credits		4,763			4,191
State Taxes		3			-
Other		890			49
Gross deferred tax assets		80,538			68,549
Less: valuation allowance		(79,476	)		(64,211	)
Net deferred tax assets		1,062			4,338
Deferred tax liabilities:
Fixed assets and intangible assets		(392	)		(605	)
Right-of-use assets		(670	)		(773	)
State Taxes		-			(2,960	)
Total gross deferred tax liabilities:		(1,062	)		(4,338	)
Net deferred tax asset (liability)	$	—		$	—

The tax effects of items that give rise to significant portions of deferred tax assets are primarily net operating loss carryforwards. The Company evaluates the recoverability of deferred tax assets and assesses all available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Based on the weight of all the evidence, including a history of operating losses and the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been recorded to offset the net deferred tax asset as realization of such asset is uncertain.

On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $79.5 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company’s projections for growth.

As of December 31, 2021 and 2020, the Company had federal net operating loss carryforwards of approximately $287.6 million and $245.4 million, respectively and state net operating loss carryforwards of $173.4 million and $145.0 million, respectively. The federal and state loss carryforwards begin to expire in 2026, unless previously utilized. Due to the enactment of the Tax Cuts and Jobs Act, federal net operating losses generated beginning in 2018 are carried forward indefinitely. Therefore $170.5 million of federal net operating loss carryforwards will not expire. As of December 31, 2021 and 2020, the Company also had federal research and development tax credit carry-forwards of approximately $3.3 million and $2.9 million, respectively and state research and development tax credit carry-forwards of approximately $3.9 million and $3.4 million, respectively. The federal research and development tax credits will begin to expire in 2032. The California research and development tax credits carry-forward indefinitely.

Any uncertain tax positions would be related to tax years that remain open and subject to examination by the relevant tax authorities. The Company has no liabilities recorded for uncertain tax positions but does have unrecognized tax benefits of $1.8 million which have been recorded as a direct reduction to the deferred tax asset as of the year ended December 31, 2021. The Company has not accrued for interest or penalties associated with unrecognized tax liabilities. The Company is subject to U.S. federal tax authority examinations and U.S. state tax authority examinations for all years due to the net operating loss carryforwards. The Company files a federal U.S. tax return and several U.S. state income tax returns with varying statues of limitations.

The following changes occurred in the amount of unrecognized tax benefits:

	2021		2020
	(in thousands)
Gross unrecognized tax benefits at the beginning of the year	$	1,575	$	1,311
Increases related to current year tax positions		204		251
Increases related to prior year tax positions		12		13
Gross unrecognized tax benefits at the end of the year	$	1,791	$	1,575

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effects of COVID-19. While the CARES Act provides sweeping tax changes in response to the pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company does not believe that the CARES Act will have a material impact on its financial position, results of operations, or cash flows.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, which extended many of the benefits of the CARES Act that were scheduled to expire. The Company is evaluating the impact of the Consolidated Appropriations Act on its financial statements and related disclosures and does not expected a material impact.

On June 29, 2020, the state of California enacted Assembly Bill No. 85 (AB 85) suspending California net operating loss utilization and imposing a cap on the amount of business incentive tax credits companies can utilize, effective for tax years 2020, 2021 and 2022. There was no material impact from the provisions of AB 85 in 2020.