Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income tax expense differs from the amount computed by applying the statutory federal income tax rate due to the following (in thousands):

	Year Ended December 31,
	2021		2020
Federal tax benefits at statutory rate	$	(14,887)	$	(6,859)
State taxes, net of federal benefit	(1,275)		(1,065)
Change in valuation allowance	17,751		6,248
Stock-based compensation tax deduction over book expense	(2,790)		—
Permanent differences	(47)		557
Gain on PrognomIQ transaction	—		1,392
Research and development credits	(1,697)		(104)
Executive compensation limitations	2,806		—
Other	139		(169)
Total income tax expense	$	—	$	—

Deferred income tax reflects the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The categories that give rise to components of the deferred tax assets are as follows (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	22,385	$	9,374
Accrued expenses and reserves	1,129		1,336
Research and development credits	2,073		534
Stock-based compensation	4,198		1,782
Lease liabilities	6,182		—
Other	56		13
Gross deferred tax assets	36,023		13,039
Less valuation allowance	(30,194)		(12,443)
Net deferred tax assets	$	5,829	$	596
Deferred tax liabilities:
Fixed assets and intangibles	(490)		(596)
Right-of-use assets	(5,339)		—
Gross deferred tax liabilities	(5,829)		(596)
Total net deferred tax assets (liabilities)	$	—	$	—

The tax benefit of net operating losses, temporary differences, and credit carryforwards are recorded as an asset to the extent that management assesses that realization is “more likely than not.” Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred. A significant piece of objective negative evidence evaluated was the cumulative loss incurred since the Company’s incorporation in 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2021 and 2020, a full valuation allowance has been recorded against the Company’s net deferred tax assets. The amount of the net deferred tax assets considered realizable, could be adjusted as estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. For the years ended December 31, 2021 and 2020, the net changes in the net valuation allowance were an increase of $17.8 million and an increase of $6.2 million, respectively.

As of December 31, 2021 and 2020, the Company had federal net operating loss carryforwards of approximately $94.0 million and $36.2 million, respectively, which will carry forward indefinitely. At December 31, 2021 and 2020, the Company had state net operating loss carryforwards of approximately $84.5 million and $33.0 million, respectively, which will begin to expire in 2035 for state tax purposes.

As of December 31, 2021 and 2020, the Company had federal research and development credit carryforwards of approximately $1.5 million and $0.2 million, respectively, which begin to expire in 2037 and state research and development credit carryforwards of approximately $1.6 million and $0.7 million, respectively, which will carry forward indefinitely.

Utilization of the Company’s federal and state net operating loss and tax credit carryforwards may be subject to an annual limitation in the event that there is a change in ownership as provided by Section 382 of the Internal Revenue Code and similar state codes. Such limitation could result in a deferral or expiration of the utilization of the net operating loss and tax credit carryforwards. The Company has not performed a Section 382 study in the current year. The Company does not believe that per Section 382 there will be a deferral or limitation on the utilization of the net operating loss and tax credit carryforwards.

As of December 31, 2021 and 2020, the Company had unrecognized tax benefits of approximately $0.8 million and $0.3 million, respectively. The amount of unrecognized tax benefits is not expected to significantly change over the next 12 months. If recognized, unrecognized tax benefits would not have an impact on the Company’s effective tax rate due to the Company’s full valuation allowance position. The beginning and ending unrecognized tax benefits amounts is as follows (in thousands):

	December 31,
	2021		2020
Beginning balance	$	337	$	264
Change related to prior year provisions	(154)		(80)
Change related to current year provisions	656		153
Ending balance	$	839	$	337

It is the Company’s policy to include any assessed penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary. Management determined that no accrual for interest and penalties was required as of December 31, 2021.

For year ended December 31, 2021 and 2020, the Company did not record an income tax expense. The Company will continue to maintain a full valuation allowance against its deferred tax assets as the Company believes it is more likely than not that the related deferred tax asset will not be realized. As a result, the Company’s income tax expense will remain at nil as no items that are either estimated or discrete items would impact the tax expense for the period.

On March 27, 2020 and December 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriation Act (CAA), respectively, as a result of the Coronavirus pandemic, which contain among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company has evaluated the current legislation and at this time, does not anticipate the CARES Act or the CCA to have a material impact on its consolidated financial statements for the year ended December 31, 2021.

All tax returns will remain open for examination by the federal and state taxing authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.