Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

8. Income Taxes

For the years ended December 31, 2021 and 2020, the Company recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated in each period, due to its uncertainty of realizing a benefit from those items. All of the Company’s operating losses since inception have been generated in the United States.

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

	Year Ended December 31,
	2021		2020
Federal statutory income tax rate	21.0	%	21.0	%
State income taxes, net of federal benefit	6.1		6.2
Federal and state research and development tax credits	3.9		4.0
Non-deductible items	(0.3)		(0.2)
Change in deferred tax asset valuation allowance	(30.7)		(31.0)
Effective income tax rate	—	%	—	%

Net deferred tax assets as of December 31, 2021 and 2020 consisted of the following (in thousands):

		December 31,
		2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	25,124	$	11,214
Research and development tax credit carryforwards		3,237		1,236
Intangible assets		761		432
Salaries and wages		—		313
Stock compensation		430		80
Other		137		76
Total deferred tax assets		29,689		13,351
Deferred tax liabilities:
Property and equipment		(261)		(111)
Prepaid expenses		(485)		—
Total deferred tax liabilities		(746)		(111)
Valuation allowance		(28,943)		(13,240)
Net deferred tax assets	$	—	$	—

As of December 31, 2021, the Company had federal net operating loss carryforwards of $93.1 million, which may be available to offset future taxable income, of which $3.2 million of the total net operating loss carryforwards expire at various dates beginning in 2036, while the remaining $89.9 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. In addition, as of December 31, 2021, the Company had state net operating loss carryforwards of $88.0 million, which may be available to offset future taxable income and expire at various dates beginning in 2036. As of December 31, 2021, the Company also had federal and state research and development tax credit carryforwards of $2.3 million and $1.2 million, respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2039 and 2034, respectively.

Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 and Section 383 of the Internal Revenue Code of 1986 (Code), and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income and tax liabilities. In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 5% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382 of the Code, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before their utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which consist primarily of net operating loss carryforwards and research and development tax credit carryforwards. Management has considered the Company’s history of cumulative net losses incurred since inception, estimated future taxable income, and prudent and feasible tax planning strategies and has concluded that it is more likely than not that the Company will not realize the benefits of federal and state net deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2021 and 2020. The Company reevaluates the positive and negative evidence at each reporting period.

The valuation allowance increased by $15.7 million and $8.2 million for the year ending December 31, 2021 and 2020, respectively. The increase in the valuation allowance for deferred tax assets during the years ended December 31, 2021 and 2020 related primarily to the increases in net operating loss carryforwards and research and development tax credit carryforwards.

The Company assesses the uncertainty in its income tax positions to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement with the relevant taxing authority. The Company’s policy is to recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any, in its consolidated statements of operations. As of December 31, 2021 and 2020, the Company had not recorded any reserves for uncertain tax positions or related interest and penalties.

The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. Due to net operating losses incurred, the Company’s tax returns from inception to date are subject to examination by the taxing authorities.