Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

11. Income Taxes

The components of loss before income tax is as follows (in thousands):

	December 31,
	2022		2021		2020
Domestic	$	(41,307)	$	(43,241)	$	(5,995)
Foreign		—		—		—
	$	(41,307)	$	(43,241)	$	(5,995)

During the years ended December 31, 2022, 2021 and 2020, the Company recorded no income tax benefits for the net operating losses (NOLs) incurred due to the uncertainty of realizing a benefit from those items.

A reconciliation of the Company’s effective tax rate to the U.S. Federal statutory rate is as follows:

	December 31,
	2022		2021		2020
Federal tax benefit at statutory rate	21	%	21	%	21	%
State tax, net of Federal benefit	8	%	9	%	14	%
Change in valuation allowance	(22)	%	(26)	%	(24)	%
Research and development tax credits	2	%	3	%	19	%
Share based Compensation	(1)	%	(1)	%	(10)	%
162(m) covered employees compensation limitation	—	%	—	%	(6)
FIN48 Reserve	—	%	(1)	%	(161)	%
Investment in Angel	(7)	%	(3)	%	174
Gain on transfer of intellectual property	—		—	%	(20)
Prior year federal true-up	—	%	(1)	%	(7)	%
Other	(1)	%	(1)		—
Effective income tax rate	0	%	0	%	0	%

The effective tax rate is different from the federal statutory tax rate primarily due to a foreign rate differential and a valuation allowance against deferred tax assets as a result of the Company’s history of losses.

The principal components of the Company’s net deferred tax assets are as follows (in thousands)

	December 31,
	2022		2021		2020
Deferred tax assets
Net operating loss carryforwards	$	56,030	$	52,539	$	42,344
Tax credit carryforwards		9,888		9,181		7,894
Capitalized tax assets		155		125		63
Accruals		124		137		207
Stock compensation		5,487		5,006		4,942
Operating lease liability		728		1,021		646
IRC 174 capitalization		4,518		—		—
Other		21		12		47
Total deferred tax assets	$	76,951	$	68,021	$	56,143
Deferred tax liabilities
Operating lease right-of-use asset	$	(620)	$	(893)	$	(461)
Valuation allowance		(76,331)		(67,128)		(55,682)
Net deferred tax assets	$	—	$	—	$	—

The Company recorded a valuation allowance against its deferred tax assets at December 31, 2022 and 2021 because Company management believed that it was more likely than not that these assets would not be fully realized in the future. The valuation allowance increased by approximately $9.2 million and $11.4 million for the years ended December 31, 2022 and 2021, respectively. Changes in the valuation allowance for deferred tax assets relate primarily to the increase in the Company’s net operating loss carryforward.

As of December 31, 2022, the Company had federal NOL carryforwards of approximately $219.7 million and state NOL carryforwards of approximately $274.9 million which are available to reduce future taxable income. The NOLs will begin to expire in 2034, if not utilized. As of December 31, 2022, the amount of federal NOL carryforwards that does not expire, is $155.3 million. Utilization of the net operating loss carryforwards are subject to various limitations due to the ownership change limitations provided by Internal Revenue Code (IRC) Section 382 and similar state provisions.

As of December 31, 2022, the Company also had $8.6 million of federal and $4.7 million of state research and development tax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire 2035, if not utilized. The state research and development tax credits have no expiration date.

In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, significantly reforming the Internal Revenue Code of 1986, as amended (IRC). The TCJA contained certain provisions that went into effect on January 1, 2022, including a provision impacting Section 174 of the IRC whereby for tax years beginning on or after January 1, 2022, taxpayers are required to capitalize and amortize, rather than deduct, research and development (R&D) expenses. The R&D expenses under Section 174 must be amortized over five years for research performed in the U.S. and 15 years for research performed outside the U.S. The mandatory capitalization requirement did not impact the Company’s net deferred tax assets and 2022 cash tax liabilities. The Company will continue to monitor the effect of these provisions and is in the process of analyzing the potential impact to its income taxes and financial position in future years.

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $21.9 million as of December 31, 2022, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.

As of December 31, 2022, the Company had unrecognized tax benefits (“UTBs”) of approximately $12.7 million. All of the deferred tax assets associated with these UTBs are fully offset by a valuation allowance. The following table summarizes the activity related to UTBs:

	December 31,
	2022		2021		2020
Unrecognized tax benefits beginning of the period	$	12,504	$	12,157	$	1,885
Decrease related to the prior year		—		—		—
Increased related to the current year		216		347		10,272
Unrecognized tax benefits, end of the period	$	12,720	$	12,504	$	12,157

The Company follows the provisions of ASC 740, Accounting for Income Taxes, and the accounting guidance related to accounting for uncertainty in income taxes. The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. None of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate. The Company does not anticipate the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The Company will recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. Management determined that no accrual for interest or penalties was required as of December 31, 2022, 2021 and 2020.

The Company currently has no federal or state tax examinations in progress nor has it had any federal or state examinations since inception. As a result of the Company’s net operating loss carryforwards, all of its tax years are subject to federal, state and foreign tax examinations.