Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 8. INCOME TAXES

The Company has not recorded any tax provision or benefit for federal income taxes for the years ended December 31, 2021 and 2020. Current income taxes are based upon the year’s income taxable for federal and state tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes. Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income, and NOL and R&D tax credit carryforwards.

A reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes for the years ended December 31, 2021 and 2020 is as follows:

	For the Year Ended December 31,
	2021			2020
Statutory federal income tax rate		21.0	%		21.0	%
State tax, net of federal benefit		0.7			5.1
Change in fair value of tranche and warrant liabilities		(16.9	)		1.7
Non-deductible expense		(0.1	)		—
R&D credit		(0.3	)		4.1
Rate change		(0.2	)		—
Other		0.1			—
Change in valuation allowance		(4.3	)		(31.9	)
Income tax provision (benefit)		0.0	%		0.0	%

Significant components of the Company’s deferred tax assets as of December 31, 2021 and 2020 were as follows (in thousands):

	December 31,
	2021			2020
Deferred tax assets:
Net operating loss	$	10,819		$	6,354
R&D credit		1,381			1,681
Stock compensation		263			85
Accruals and other temporary differences		58			—
Gross deferred tax assets		12,521			8,120
Depreciation		(1	)		—
Valuation allowance		(12,520	)		(8,120	)
Deferred tax assets, net of allowance	$	—		$	—

In assessing the realizability of deferred tax assets as of December 31, 2021 and 2020, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or the NOL carryforwards and R&D tax credit carryforwards will be used. The Company has determined that it is not more likely than not that its deferred tax assets will be realized. Accordingly, a valuation allowance for the full amount of the net deferred tax assets has been recorded as of December 31, 2021 and 2020. The change in the valuation allowance as of December 31, 2021 from December 31, 2020 is due to the pretax loss incurred for the year ended December 31, 2021.

As of December 31, 2021, the Company had approximately $40.9 million of NOL carryforwards available for federal tax purposes which begin to expire on December 31, 2028. As a result of the Tax Act of 2017, for U.S. income tax purposes, NOLs generated prior to December 31, 2017 can still be carried forward for up to 20 years, but NOLs generated after December 31, 2017 carryforward indefinitely, but are limited to 80% utilization against taxable income. Of the total federal NOL of $40.9 million, $6.4 million will begin to expire in 2028 and $34.5 million will not expire but will only offset 80% of future taxable income.

As of December 31, 2021, the Company also had approximately $49.5 million of state NOL carryforwards. The state NOLs begin to expire on December 31, 2028.

As of December 31, 2021, the Company had approximately $1.4 million of R&D credit carryforwards available for federal tax purposes, which begin to expire on December 31, 2023.

NOL carryforwards and R&D carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be used annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with such study, and the fact that there may be additional such ownership changes in the future.

The Company conducts intensive research and experimentation activities, generating R&D tax credits for federal and state purposes under section 41 of the Code. The Company has not performed a formal study validating these credits claimed in the tax returns. Once a study is prepared, the amount of R&D tax credits available could vary from what was originally claimed on the tax returns.

The Company is subject to U.S. federal and various state taxes. Generally, the tax years remain open for examination by the federal statute under a three-year statute of limitation; however, states generally keep their statutes open for four years. However, the Company’s tax years from 2003 and after are subject to examination by the United States and state taxing authorities due to the carry forward of unused NOLs and R&D credits.