Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

For the year ended December 31, 2021 and 2020, the income tax expense from continuing operations was zero and $7,000 and is recorded in general and administrative expense in the accompanying statements of operations.

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

	Years Ended December 31,
	2021			2020
Income tax expense (benefit) at statutory rates	$	(18,938	)	$	(6,538	)
State income tax, net of federal benefit		(5,865	)		(586	)
Permanent items		255			(14	)
Change in valuation allowance		28,219			7,373
Forfeiture of state operating losses		42			521
Stock-based compensation		751			82
Purchase price accretion		101			311
Return to provision adjustment		(84	)		293
Research and development tax credits		(4,481	)		(1,442	)
	$	—		$	—

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 the Company’s deferred tax assets and liabilities related to continuing operations for federal and state income taxes are follows (in thousands):

	December 31,
	2021			2020
Deferred tax assets:
Net operating loss carryforward	$	32,373		$	11,333
Research tax credits		7,012			2,509
Accrued and other		1,980			543
Stock-based compensation		1,390			121
Total deferred tax assets		42,755			14,506
Less valuation allowance		(42,688	)		(14,477	)
Net deferred tax assets		67			29
Deferred tax liabilities:
Property and equipment		(67	)		(29	)
Total deferred tax liabilities		(67	)		(29	)
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, 2021 due to the uncertainty surrounding the realization of such assets. Management determined it more likely than not that the deferred tax assets are not realizable due to our historical loss position. The valuation allowance increased by $28.2 million and $7.4 million between December 31, 2020 and December 31, 2021 and between December 31, 2019 and December 31, 2020, respectively, due primarily to the generation of current year operating losses.

As of December 31, 2021, the Company has net operating loss carryforwards for federal and state income tax purposes of $126.1 million and $85.0 million, respectively. The federal and state NOLs will begin to expire in 2036, unless previously utilized. The federal net operating loss carryover include $125.2 million of net operating losses generated in 2018 and after. Federal net operating losses generated in 2018 and after carryover indefinitely and may generally be used to offset up to 80% of future taxable income.

The Company has research credit carryforwards for federal and state income tax purposes of approximately $5.1 million and $4.7 million, respectively, as of December 31, 2021. The federal credits begin to expire in 2037 and the state credits can be carried forward indefinitely.

Pursuant to the Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company's NOL and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company had an ownership change analysis completed through June 30, 2021 and determined that ownership changes there were ownership changes on May 31, 2017, September 1, 2017, September 26, 2017, May 29, 2019, March 27, 2020 and January 29, 2021. Based on the annual limitations associated with the change dates, the Company determined that all of the Company's federal and state NOLs and credits generated prior to theses change dates, with the exception of $968,000 federal research and development credits and $562,000 state NOLs, will be fully available within the carryover period, subject to an annual limitation on NOLs and credits generated prior to January 29, 2021. The Company’s research and development credits have been reduced by $968,000 to reflect the impact of the ownership changes and the Company’s state NOLs have been reduced by $562,000. Due to the existence of a full valuation allowance offsetting the credit, the reduction to the carryover balance did not impact the Company’s effective tax rate. The Company's use of federal and state NOL and credit carryforwards could be further limited by the provisions of section 382 depending on the timing and amount of additional equity securities that have or will be issued subsequent to June 30, 2021. If an ownership change(s) occur subsequent to June 30, 2021 the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company's effective tax rate.  

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. Income tax positions must meet a more likely than not recognition at the effective date to be recognized. 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):

	December 31,
	2021			2020
Balance at beginning of period	$	697		$	300
Increase (decrease) related to prior year positions		(186	)		—
Increase related to current year positions		1,438			397
Balance at the end of the year	$	1,949		$	697

The Company’s policy is to recognize interest and penalties related to income tax matters in the provision. During the years ended December 31, 2021 and 2020, no interest or penalties were required to be recognized relating for unrecognized tax benefits.

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.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. Due to the loss position of the U.S. entities, many provisions of the CARES Act do not impact the Company and the CARES Act did not have an impact on the Company’s income tax provision for the years ended December 31, 2021 or 2020.