Income taxes

12 Months Ended

Dec. 31, 2020

Income taxes

Income taxes

14. Income taxes

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

	Year ended
	December 31,
	2020		2019
Federal tax benefit at statutory rate	21.0	%	21.0	%
State tax, net of federal benefit	5.8		7.9
Research and development credits	0.9		3.8
Permanent differences	(6.8)		(0.1)
Change in valuation allowance	(20.9)		(32.6)
	—	%	—	%

The components of the Company’s deferred taxes are as follows (in thousands):

	December 31,
(in thousands)	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	13,693	$	10,202
Research and development credits		1,560		1,355
Share-based compensation		82		194
Accrued bonus		201		120
Amortization		2		3
Gross deferred tax assets		15,538		11,874
Less: valuation allowance		(15,435)		(11,711)
Net deferred tax asset		103		163
Deferred tax liability
Depreciation		(103)		(163)
Total deferred tax liabilities	$	—	$	—

The Company had no income tax expense due to the operating loss incurred for the years ended December 31, 2020 and 2019. Management has evaluated the positive and negative evidence bearing upon the realizability of the Company’s net deferred tax assets and has determined that it is more likely than not that the Company will not recognize the benefits of the net deferred tax assets. As a result, the Company has recorded a full valuation allowance at December 31, 2020 and 2019. The valuation allowance increased by $3.7 million and $3.4 million in 2020 and 2019, respectively, due to the increase in deferred tax assets, primarily due to net operating loss carryforwards, and research and development tax credits, and deductible accrued expenses.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss and other attributes including research and development credit carry forwards which could be used annually to offset future taxable income. Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not currently completed an evaluation of ownership changes through December 31, 2020 to assess whether utilization of the Company’s net operating loss or research and development credit carryforwards would be subject to an annual limitation under Sections 382 and 383. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject to limitation. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position. As a result, the Company is not able to estimate the effect of the change

in control, if any, on the Company’s ability to utilize net operating loss and research and development credit carryforwards in the future. The Company has not yet conducted a study of its research and development credit carryforwards. This study may result in an increase or decrease to the Company’s credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the Company’s financial statements.

As of December 31, 2020, the Company had $47.3 million of federal and $47.7 million of state net operating loss carryforwards. As of December 31, 2019, the Company had $35.3 million of federal and $35.3 million of state net operating loss carryforwards. If not utilized, the federal and state net operating loss carryforwards expire starting in 2027. Included in the federal net operating loss carryforwards is $18.3 million of net operating loss generated in 2018 and 2019 that will not expire. Federal net operating loss carryforwards of $12.3 million and $10.0 million generated in 2020 and 2019, respectively, will be limited to offset 80% of our taxable income for taxable years beginning after December 31, 2020. Certain federal and state net operating loss carryforwards expire at various dates through 2039. As of December 31, 2020, we had cumulative federal R&D tax credits of $1.4 million. These tax credit carryforwards will expire at various dates through 2039.

As of December 31, 2020 and 2019, the Company had no uncertain tax positions. The Company recognizes both interest and penalties associated with unrecognized tax benefits as a component of income tax expense. The Company has not recorded any interest or penalties for unrecognized tax benefits since its inception.

The Company filed income tax returns in the United States and Pennsylvania in all tax years since inception. The tax years 2016 and beyond remain open to examination by these jurisdictions. Carryforward attributes generated in all years since inception remain subject to adjustment. The Company is not currently under examination by the Internal Revenue Service or any other jurisdiction for these years.