Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

The Company has not recorded any net tax provision for the periods presented due to the losses incurred and the need for a full valuation allowance on net deferred tax assets. The difference between the income tax expense at the U.S. federal statutory rate and the recorded provision is primarily due to the valuation allowance provided on all deferred tax assets. The Company’s loss before income tax for the periods presented was generated entirely in the United States:

A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate as of December 31, 2022 and 2021 is as follows:

	2022			2021
Tax provision at statutory rate		21.0	%		21.0	%
State taxes, net of federal benefit		5.6	%		5.3	%
Federal tax credits		2.9	%		2.6	%
Permanent items		(1.1	)%		(0.4	)%
Other		0.1	%		(0.3	)%
Decrease in valuation reserve		(28.5	)%		(28.2	)%
Total		0.0	%		0.0	%

Temporary differences that give rise to significant deferred tax assets (liabilities) as of December 31, 2022 and 2021 are as follows (in thousands):

	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	40,617		$	36,287
Stock-based compensation expense		1,235			635
Capitalized research and development expenses		10,200			—
Tax credit carryforwards		7,924			5,821
Accrued expenses		—			517
Lease liability		5,461			248
Other		307			194
Total deferred tax assets		65,744			43,702
Deferred tax liabilities:
Right of use asset		(5,412	)		(241	)
Depreciable assets		(207	)		(182	)
Accrued expenses		(93	)		—
Valuation allowance		(60,032	)		(43,279	)
Net deferred tax asset	$	—		$	—

As of December 31, 2022, the Company had federal gross operating loss carryforwards of approximately $155.1 million which may be available to offset future taxable income, of which $44.2 million begin to expire in 2029 and go through 2037 and $110.9 million do not expire. The Company had state gross operating loss carryforwards of $127.5 million, which may be available to offset future taxable income and which would begin to expire in 2030, except for $0.7 million of state NOLs that do not expire. As of December 31, 2022, the Company had federal and state research and experimentation credit carryforwards of $6.4 million and $1.9 million, respectively, which may be available to offset future income tax liabilities and which would begin to expire in 2029 and 2028, respectively.

The Company’s ability to use its operating loss carryforwards and tax credit carryforwards to offset taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal Revenue Code (the “Internal Revenue Code”). Under the Internal Revenue Code provisions, certain substantial changes in the Company’s ownership, including the sale of the Company or significant changes in ownership due to sales of equity, have limited and may limit in the future, the amount of net operating loss carryforwards which could be used annually to offset future taxable income. The Company has not yet completed an analysis of ownership changes. The Company may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside the Company’s control. As a result, the Company’s ability to use our pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to the Company. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. All Federal NOLs generated post tax reform have an indefinite life, are not subject to carryback provisions, and limited to 80% of income in any year.

The Company has not conducted a study of its research and development credit carryforwards. A study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed, and any adjustment is known, no amounts will be presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations at this time, if an adjustment were required.

Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are principally comprised of NOL carryforwards and tax credit carryforwards. Management has determined that it is more likely than not that the Company will not realize the benefits of its deferred tax assets, and as a result, a valuation allowance of $60.0 million has been recorded at December 31, 2022. The increase in the valuation allowance of $16.8 million during the year ended December 31, 2022 was primarily due to the increase in net operating loss generated by the Company and capitalized R&D expenses related to the new Section 174 requirements.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures currently and requires taxpayers to amortize them, over five years for domestically incurred expenditures and over fifteen years for foreign incurred expenditures, pursuant to Internal Revenue Code Section 174. As of December 31, 2022, the Company has recorded a gross deferred tax asset of $39.0 million related to the Capitalized IRC Section 174 expenditures.

As of December 31, 2022 and 2021, the Company had no unrecognized tax benefits. Interest and penalty charges, if any, related to income taxes would be classified as a component of the provision for income taxes in the consolidated statements of operations. The Company does not expect any significant change in its uncertain tax positions in the next twelve months.

The Company files income tax returns in the United States federal tax jurisdiction and several state tax jurisdictions. Since the Company is in a loss carryforward position, it is generally subject to examination by federal and state tax authorities for all tax years in which a loss carryforward is available.

The Inflation Reduction Act signed into law on Aug. 16, 2022 and includes several provisions, including the largest investment in combating climate change in U.S. history, lowers the cost of prescription drugs and raises taxes on corporations. The effects of the bill were considered and based on the Company’s taxable loss position, there is no tax impact to the provision.