INCOME TAXES

12 Months Ended

Dec. 31, 2019

For the years ended December 31, 2019 and 2018, the Company recorded no income tax benefit for the net operating losses incurred each year, due to its uncertainty of realizing a benefit from those items. A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations as of December 31, 2019 and 2018, respectively, is as follows:


	December 31,
	2019		2018
U.S. federal statutory income tax rate	21.0	%	21.0 %
State and local taxes, net of federal benefit	1.6	%	5.1 %
Permanent differences	(4.2)	%	0.0	%
Research and development credits	1.6	%	3.7 %
Change in valuation allowance	(19.8)	%	(29.8)	%
Other	(0.2)	%	0.0	%
Effective income tax rate	0.0 %		0.0 %

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows (in thousands):


	Tax year ended December 31,
	2019		2018
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	9,512	$	2,904
Research and development tax credits	1,014		459
Accrual to cash adjustment	—		657
Accruals and other	280		—
Stock-based compensation	196		—
Total deferred tax assets	11,002		4,020
Valuation Allowance	(10,995)		(4,010)
Subtotal	7		10
Net fixed assets	(7)		(10)
Net deferred tax assets	$	—	$	—

As of December 31, 2019, the Company had federal and state net operating loss carryforwards of $39,596 and $20,075, respectively, which may be used to offset future taxable income, if any. These amounts begin to expire in 2036. The federal net operating losses generated in 2018 and 2019 can be carried forward indefinitely. The Company also has net operating loss carryforwards in Canada of $222 that are set to expire beginning in 2038. Additionally, the Company had federal research and development tax credit carryforwards of $1,014 that expire at various dates through 2039.

In assessing the realizability of the net deferred tax asset, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. Management believes that it is more likely than not that the Company’s deferred income tax assets will not be realized. As such, there is a full valuation allowance against the net deferred tax assets as of December 31, 2019 and 2018. The valuation allowance increased by $6,985 during the year ended December 31, 2019 primarily as a result of net losses generated during the period.

Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, 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. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% 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, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, 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, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company also has not conducted a study of its research and development credit carryforwards, which may result in an adjustment to research and development credit carryforwards. 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. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are 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 realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2019 and 2018, the Company had no unrecognized tax benefits.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019 and 2018, the Company had no accrued interest or penalties related to uncertain tax positions.

The Company files 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. There are currently no pending tax examinations. As of December 31, 2019 and 2018, the Company’s tax years are still open under statute from 2016 to the present.

The Company’s foreign subsidiary has incurred losses since inception and the Company had no undistributed earnings as of December 31, 2019.