Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

The Company recorded a current state tax provision of zero related to state minimum taxes for each of the years ended December 31, 2022 and 2021, which is recorded in general and administrative expenses in the accompanying statement of operations and comprehensive loss.

A reconciliation of the Company’s effective tax rate and federal statutory tax rate is summarized as follows (in thousands):

	Years Ended December 31,
	2022			2021
Income tax benefit at statutory rates	$	(18,501	)	$	(20,704	)
Permanent items		5			2
Valuation allowance		16,920			20,028
Stock-based compensation		1,307			968
Research and development tax credits		269			(1,572	)
Preferred tranche liability fair value adjustment		—			1,278
Provision for income taxes	$	—		$	—

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):

	December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforward	$	42,564		$	41,548
Research tax credits		6,928			6,366
Intangible assets		168			186
Reserves and accruals		3,787			827
Stock-based compensation		1,953			1,026
Lease liability		6,600			7,075
Capitalized research and development expenses		13,250			—
Total deferred tax assets		75,250			57,028
Less valuation allowance		(68,192	)		(49,385	)
Net deferred tax assets		7,058			7,643
Deferred tax liabilities:
Right-of-use assets		(6,443	)		(7,101	)
Property and equipment		(472	)		(366	)
Prepaid assets		(143	)		(176	)
Total deferred tax assets		(7,058	)		(7,643	)
Net deferred tax assets	$	—		$	—

A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs to be considered. The Company has established a full valuation allowance against the net deferred tax assets as of December 31, 2022 and 2021 due to historical losses and uncertainty surrounding the use of such assets. The valuation allowance increased by $18.8 million between December 31, 2022 and December 31, 2021 due primarily to the generation of operating losses.

As of December 31, 2022, the Company has net operating loss carryforwards for federal and state income tax purposes of $183.2 million and $230.5 million, respectively. The federal net operating loss carryforwards generated prior to 2018 and state net operating loss carryforwards, if not utilized, will expire beginning in 2035. Federal net operating losses aggregating $178.8 million are not subject to expiration.

The Company has research credit carryforwards for federal and state income tax purposes of approximately $7.1 million and $4.7 million, respectively, as of December 31, 2022. The federal credits begin to expire in 2038 and the state credits can be carried forward indefinitely.

Utilization of some of the federal and state net operating loss and credit carryforwards may be subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company has performed a Section 382 study as of December 31, 2021 and expects approximately $2.8 million of federal research and development tax credits and $51.0 million of California net operating losses to expire unused due to Section 382 limitations.

The Company files tax returns in the United States and California. The Company is not currently under examination in any of these jurisdictions and all of the Company’s tax years remain effectively open to examination due to net operating loss carryforwards.

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Due to the existence of the full valuation allowance, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate. The Company does not foresee material changes to its liability for uncertain tax benefits within the next 12 months.

The following table summarizes the activity in the Company’s gross unrecognized tax benefits (in thousands):

	Years Ended December 31,
	2022			2021
Balance at beginning of period	$	12,659		$	1,125
Increase related to prior year positions		—			4,139
Decrease related to prior year positions		(5,054	)		—
Increase related to current year positions		6,214			7,395
Balance at end of period	$	13,819		$	12,659

During the years ended December 31, 2022 and 2021, no interest or penalties were required to be recognized relating for unrecognized tax benefits. In the event the Company should need to recognize interest and penalties related to unrecognized income tax liabilities, this amount will be recorded as an accrued liability and an increase to income tax expense.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES Act”) was signed into law. Among other things, the CARES Act permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. The CARES Act did not have a significant impact to the Company for any years.

On June 29, 2020, California Governor Newsom signed to law the state’s budget package which included Assembly Bill 85 (AB 85). AB 85 contained two major tax changes: (1) it suspends the usage of net operating losses for certain taxpayers; and (2) it limits certain business tax credits for tax years 2020, 2021, and 2022. Senate Bill 113 (SB 113), which Governor Newsom signed into law Feb. 9, 2022, contains important California tax law changes, including reinstatement of 2022 business tax credits and net operating loss deductions limited by AB 85. The Company is in a taxable loss position in 2022 and 2021 and thus the bill has no impact on the financial statements.