Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The income tax provision for the years ended December 31, 2022 and 2021 was immaterial. The effective tax rate was 0% for the years ended December 31, 2022 and 2021 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:

	2022		2021
	(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, 2022. 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, 2022. 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,
	2022			2021
Tax computed at federal statutory rate		21.00	%		21.00	%
State income tax - net of federal benefit		2.01	%		3.31	%
Tax credits		0.98	%		1.13	%
Change in valuation allowance		(20.41	)%		(25.51	)%
Stock-based compensation		(2.03	)%		(0.20	)%
Other deferred adjustments		(1.31	)%		0.56	%
Permanent items		(0.24	)%		(0.29	)%
Income tax provision		0.00	%		0.00	%

The significant components that comprised the Company’s net deferred taxes at December 31, 2022 and 2021 are as follows:

	2022			2021
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	78,276		$	70,731
Fixed assets and intangible assets		1,244			1,449
Lease liabilities		514			660
Accruals and reserves		1,170			1,178
Stock-based compensation		918			864
Tax credits		5,375			4,763
State Taxes		-			3
Employee Retention Credit		172			-
Research & Development		3,077			-
Other		1,346			890
Gross deferred tax assets		92,092			80,538
Less: valuation allowance		(91,113	)		(79,476	)
Net deferred tax assets		979			1,062
Deferred tax liabilities:
Fixed assets and intangible assets		(408	)		(392	)
Right-of-use assets		(571	)		(670	)
State Taxes		—			—
Total gross deferred tax liabilities:		(979	)		(1,062	)
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, 2022, a valuation allowance of $91.1 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, 2022 and 2021, the Company had federal net operating loss carryforwards of approximately $321.6 million and $287.6 million, respectively and state net operating loss carryforwards of $186.4 million and $173.4 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 $204.4 million of federal net operating loss carryforwards will not expire. As of December 31, 2022 and 2021, the Company also had federal research and development tax credit carry-forwards of approximately $3.7 million and $3.3 million, respectively and state research and development tax credit carry-forwards of approximately $4.4 million and $3.9 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 $2.0 million which have been recorded as a direct reduction to the deferred tax asset as of the year ended December 31, 2022. 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:

	2022		2021
	(in thousands)
Gross unrecognized tax benefits at the beginning of the year	$	1,791	$	1,575
Increases related to current year tax positions		207		204
Increases related to prior year tax positions		22		12
Gross unrecognized tax benefits at the end of the year	$	2,020	$	1,791