Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company has limited foreign operations and pre-tax loss from its foreign operations has no material impact on Income tax. Income tax expense attributable to loss from continuing operations consists of (in thousands):

	Current		Deferred		Total
Year ended December 31, 2021
U.S. operations	$	—	$	(94,232)	$	(94,232)
Valuation allowance	—		94,232		94,232
	$	—	$	—	$	—
Year ended December 31, 2020
U.S. operations	$	—	$	(8,011)	$	(8,011)
Valuation allowance	—		8,011		8,011
	$	—	$	—	$	—

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The Company records income tax expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records valuation allowances to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized. Its assessment considers the recognition of deferred tax assets on a jurisdictional basis. The Company has placed a full valuation allowance against U.S. federal and state deferred tax assets since the recovery of the assets is uncertain.

The tax effects of significant items comprising the Company’s deferred taxes are as follows (in thousands):

	As of December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	104,174	$	13,448
Tax credits	3,842		994
Lease liability	5,085		579
Other	892		120
Total gross deferred income tax assets	113,993		15,141
Deferred tax liabilities:
ROU asset	(5,198)		(579)
Total gross deferred income tax liabilities	(5,198)		(579)
Net deferred income tax assets	108,794		14,562
Valuation allowance	(108,794)		(14,562)
Deferred tax asset, net of allowance	$	—	$	—

ASC 740 requires that the tax benefit of net operating losses (“NOLs”), temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits from operating loss carryforwards is currently not likely to be realized and, accordingly, has provided a valuation allowance against its deferred tax assets.

The changes in the valuation allowance related to current year operating activity was an increase in the amount of $94 million during the year ended December 31, 2021.

	Year Ended December 31,
	2021		2020
Beginning of the year	$	14,562	$	6,551
Increase—income tax benefit	94,232		8,011
End of the year	$	108,794	$	14,562

The effective tax rate of the Company’s (provision) benefit for income taxes differs from the federal statutory rate as follows:

	Year Ended December 31,
	2021		2020
Expected federal income tax benefit	21.0	%	21.0	%
State taxes net of federal benefit	3.7	%	-0.7	%
Tax credits	0.8	%	0.1	%
Valuation allowance	-20.0	%	-6.2	%
Fair value of derivatives	-6.2	%	-13.8	%
Other	0.7	%	-0.4	%
Income taxes provision (benefit)	0.0	%	0.0	%

Net Operating Losses

Federal and state laws impose substantial restrictions on the utilization of NOLs and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. Depending on the significance of past and future ownership changes, the Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be significantly reduced.

As of December 31, 2021, the Company has approximately $402 million and $294 million of federal and state NOLs respectively. Federal NOLs generated prior to 2017 begin expiring in the calendar year 2036. Under the new Tax Cuts and Jobs Act, all NOLs incurred after December 31, 2018 are carried forward indefinitely for federal tax purposes. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed in to law on March 27, 2020, provided that NOLs generated in a taxable year beginning in 2019, 2020, or 2021, may now be carried back five years and forward indefinitely. In addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income. California has not conformed to the indefinite carryforward period for NOLs. The NOLs begin expiring in the calendar year 2036 for state purposes.

In the ordinary course of its business, the Company incurs costs that, for tax purposes, are determined to be qualified research and development (“R&D”) expenditures within the meaning of IRC §41 and are, therefore, eligible for the Increasing Research Activities credit under IRC §41. The R&D tax credit carryforward as of December 31, 2021 is $3.2 million and $1.9 million for Federal and State, respectively. The R&D tax credit carryforwards begin expiring in the calendar year 2036 for federal purposes. The Company has adjusted the deferred tax assets related to Federal R&D credit carryover to account for any expiring tax credits.

Uncertain Tax Positions

The Company recognizes tax benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As the Company expands, it will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. The Company’s policy is to adjust these reserves when facts and circumstances change, such as the closing of a tax audit or refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the income tax expense in the period in which such determination is made and could have a material impact on its financial condition and operating results. The income tax expense includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties.

As of December 31, 2021, the Company has total uncertain tax positions of $968.000, which is related to R&D tax credits, which is recorded as a reduction of the deferred tax asset. No interest or penalties have been recorded related to the uncertain tax positions. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows (in thousands):

	Year Ended December 31,
	2021		2020
Beginning of the year	$	229	$	100
Increase related to current year tax positions	871		129
Decrease for tax positions of prior years	(129)		—
Decrease due to expiration of statute of limitations	(3)		—
End of the year	$	968	$	229

It is not expected that there will be a significant change in uncertain tax positions in the next 12 months. The Company is subject to U.S. federal and state income tax and one foreign jurisdiction. In the normal course of business, the Company is subject to examination by tax authorities. There are no tax examinations in progress as of December 31, 2021. The Company’s federal and state tax years for 2017 and forward are subject to examination by taxing authorities.