Income taxes

12 Months Ended

Dec. 31, 2020

Income taxes

Income taxes

14. Income taxes

The Company recognized deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. The Company accounts for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. The Company evaluates its tax positions on an annual basis. The benefit for incomes taxes is as follows:

	Year ended December 31,
	2020		2019		2018
	(in thousands)
Current
Federal	$	—	$	—	$	180
State		—		—		—
Total current		—		—		180
Deferred
Federal		—		—		—
State		—		—		—
Total deferred		—		—		—
Total tax expense	$	—	$	—	$	180

A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate at the Company’s effective tax rate for the years ended December 31, 2020, 2019, and 2018 is as follows:

	Year ended December 31,
	2020			2019			2018
Income tax computed at federal statutory tax rate		21.0	%		21.0	%		21.0	%
Non-deductible expenses		5.0	%		(2.2)	%		(2.1)	%
Other		1.9	%		—	%		—	%
State taxes, net of federal benefit		(2.3)	%		8.0	%		6.3	%
Change in valuation allowance		(5.0)	%		(36.2)	%		(28.1)	%
General business credit carryovers		(20.6)	%		9.4	%		3.1	%
Total		—	%		—	%		0.2	%

The Company incurred net operating losses (“NOLs”) through December 31, 2019. As of December 31, 2020, the Company had federal and state net operating loss carryforwards of $153.4 million and $140.9 million, respectively, with the pre-2018 NOLs beginning to expire in 2033, and the post 2019 portion limited to 80% of taxable income and carried forward indefinitely. During 2020, the Company did not generate federal and state NOL carryforwards. As of December 31, 2020, the Company had federal and state research and development tax credit carryforwards of $21.1 million and $8.3 million, respectively, which expire beginning in 2030. As of December 31, 2020, the Company had state investment credits of $0.9 million, which expire beginning in 2021.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of NOL carryforwards and research and development credit carryforwards that may be utilized annually to offset future taxable income and taxes payable. In general, an ownership change, as defined

by Section 382, results from transactions that increase the ownership of 5% stockholders or public groups in the stock of a corporation by more than 50 percent in the aggregate over a three-year period. During 2016, the Company completed a study through June 30, 2016, to determine whether any ownership change had occurred since the Company’s formation and determined that its transactions had resulted in three ownership changes, as defined by Section 382. Additionally, in the first quarter of the 2020 calendar year, and in the first quarter of the 2021 calendar year, the Company completed additional studies that did not identify additional ownership changes. There could be additional ownership changes in the future that could further limit the amount of NOLs and tax credit carryforwards that the Company can utilize.

The significant components of the Company’s deferred tax assets and (liabilities) as of December 31, 2020 and 2019 are as follows:

	As of December 31,
	2020		2019
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	41,130	$	49,713
Tax credit carryforwards		28,173		17,297
Deferred revenue		12,176		16,805
Lease liability		13,006		9,335
Stock compensation		4,368		5,157
Non-deductible accruals and reserves		1,288		1,502
Intangibles		721		776
Total deferred tax assets		100,862		100,585
Less valuation allowance		(84,866)		(90,920)
Net deferred tax assets		15,996		9,665
Deferred tax liabilities
Unrealized gain on available-for-sale securities		(8)		(8)
Right of use assets		(9,852)		(7,779)
Depreciation and amortization		(6,136)		(1,878)
Net deferred taxes	$	—	$	—

As required by ASC 740, management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which principally comprise NOL carryforwards, research and development credit carryforwards, and deferred revenue. Management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, and as a result, a valuation allowance of $84.9 million and $90.9 million has been established at December 31, 2020 and 2019, respectively. The change in valuation allowance was $1.0 million for the year ended December 31, 2020. The primary reason for the difference between the income tax expense recorded by the Company and the amount of income tax expense at statutory income tax rates was the change in the general business credit carryovers.

At December 31, 2020 and 2019, the Company had no unrecognized tax benefits. The Company has not as yet conducted a study of its research and development credit carryforwards. This 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 are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits, 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 sheets or statements of operations if an adjustment were required.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statements of operations. As of December 31, 2020 and 2019, the Company has no accrued interest related to uncertain tax positions. Since the Company is in a loss carryforward position, it is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years in which a loss carryforward is available.