Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

13. Income Taxes

For the years ended December 31, 2020 and 2019, the Company’s provision for income tax consisted of:

	Year Ended December 31,
	2020		2019
Current:
Federal		—		—
State		—		—
Foreign		260		—
Total Current	$	260	$	—
Deferred:
Federal		—		—
State		—		—
Foreign		—		—
Total Deferred	$	—	$	—
Provision for income taxes	$	260	$	—

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2020		2019
Tax at statutory federal rate	(21.0)	%	(21.0)	%
State taxes, net of federal benefit	(1.5)		(0.8)
Stock-based compensation	5.4		2.0
Change in uncertain tax benefits	3.1		—
Change in valuation allowance	17.0		18.9
Other	—		0.9
Provision for income taxes	3.0	%	0.0	%

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):

	December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	31,683	$	29,684
Inventory		147		874
Accruals		254		430
Depreciation and amortization		240		143
Limitation on business interest		268		186
Stock-based compensation		676		546
Right of use liability		549		776
Gross deferred tax assets		33,817		32,639
Valuation allowance		(33,265)		(31,840)
Deferred tax assets		552		799
Deferred tax liabilities:
Right of use asset		(527)		(710)
Other		(25)		(89)
Deferred tax liabilities		(552)		(799)
Net deferred tax assets	$	—	$	—

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of December 31, 2020 and 2019. There was no utilization in 2020 and the net valuation allowance increased by $1.4 million in 2020. In 2019 there was no utilization and the net valuation allowance increased by $2.8 million in 2019.

As of December 31, 2020, the Company had federal net operating loss carryforwards of approximately $140.5 million, of which $99.7 million will begin to expire in the year of 2028 through 2037 if not utilized, and $40.8 million will carryover indefinitely. In addition, the Company had state net operating loss carryforwards of approximately $54.1 million, of which $51.5 million will begin to expire in 2023 through 2040 if not utilized, and $2.6 million will carryover indefinitely.

The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act and codified under IRC Section 382) that could limit the Company’s ability to utilize these carryforwards. Should the limitation apply, the related net operating loss deferred tax asset and the valuation allowance would be reduced by the same amount.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted into law. The legislation contains a number of economic relief provisions in response to the COVID-19 pandemic, including the following tax related provisions; (1) ability to carryback tax losses five years for losses generated in tax year 2018 through 2020, (2) the ability for Corporations to elect to utilize the 2019 Adjusted Taxable Income and 50% limitation for IRC Section 163(j) purposes, (3) a technical correction to the definition of Qualified Leasehold Improvement Property, and (4) the ability to defer employer payroll taxes for the period of March 27 to December 31, 2020. As of December 31, 2020, these provisions do not materially impact the Company.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years beginning in 2008, due to the accumulated net operating losses that are carried forward.

A summary of changes in the Company’s gross unrecognized tax benefits for the years ended December 31, 2020 and 2019 was as follows (in thousands):

	Year Ended December 31,
	2020		2019
Unrecognized tax expense, beginning of the year		—		—
Increase related to prior year tax positions		91		—
Increase related to current year tax positions		13		—
Unrecognized tax expense, end of year	$	104	$	—

The total balance of unrecognized tax benefits as of December 31, 2020 would impact the effective tax rate, if recognized.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefit as a component of income tax expense. The Company has accrued penalties and interest of $156,000 and $0, as of December 31, 2020 and 2019, respectively. The Company estimates no material amount of unrecognized tax benefits will be recognized in the next 12 months.