Income Taxes

12 Months Ended

Dec. 31, 2022

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,
	2022		2021
Federal tax benefits at statutory rate	$	(19,523)	$	(14,887)
State taxes, net of federal benefit	(6,181)		(1,275)
Change in valuation allowance	24,828		17,751
Stock-based compensation tax deduction over book expense	131		(2,790)
Permanent differences	615		(47)
Research and development credits	(1,920)		(1,697)
Executive compensation limitations	2,405		2,806
Other	(355)		139
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,
	2022		2021
Deferred tax assets:
Net operating loss carryforwards	$	33,187	$	22,385
Accrued expenses and reserves	1,540		1,129
Research and development credits	4,092		2,073
Stock-based compensation	7,790		4,198
Lease liabilities	7,663		6,182
Capitalized research and development	7,819		—
Other	43		56
Gross deferred tax assets	62,134		36,023
Less valuation allowance	(54,991)		(30,194)
Net deferred tax assets	$	7,143	$	5,829
Deferred tax liabilities:
Fixed assets and intangibles	(216)		(490)
Right-of-use assets	(6,927)		(5,339)
Gross deferred tax liabilities	(7,143)		(5,829)
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 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 the Company’s projections for growth. For the years ended December 31, 2022 and 2021, the net changes in the net valuation allowance were an increase of $25.0 million and an increase of $18.0 million, respectively.

As of December 31, 2022 and 2021, the Company had federal net operating loss carryforwards of approximately $119.4 million and $94.0 million, respectively, which will carry forward indefinitely for federal tax purposes. At December 31, 2022 and 2021, the Company had state net operating loss carryforwards of approximately $122.5 million and $84.5 million, respectively, which will begin to expire in 2035 for state tax purposes.

As of December 31, 2022 and 2021, the Company had federal research and development credit carryforwards of approximately $3.0 million and $1.5 million, respectively, which begin to expire in 2039 and state research and development credit carryforwards of approximately $3.1 million and $1.6 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, 2022 and 2021, the Company had unrecognized tax benefits of approximately $1.6 million and $0.8 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,
	2022		2021
Beginning balance	$	839	$	337
Change related to prior year provisions	99		(154)
Change related to current year provisions	648		656
Ending balance	$	1,586	$	839

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, 2022.

For year ended December 31, 2022 and 2021, 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.

The Tax Cuts and Jobs Act included a change in the treatment of research and development (R&D) expenditures for tax purposes under Section 174. Effective for tax years beginning after December 31, 2021, specified R&D expenditures must undergo a 5-year amortization period for domestic spend and a 15-year amortization period for foreign spend. Prior to the effective date (2021 tax year and prior), taxpayers were able to immediately expense R&D costs under Section 174(a) or had the option to capitalize and amortize R&D expenditures over a 5-year recovery period under Section 174(b).

The Company is estimating 2022 capitalization of U.S R&D expenditures net of 2022 amortization of approximately $37.2 million (an add back to estimated 2022 US taxable income). The Company has no foreign R&D expenses.

On August 16, 2022, President Biden signed the Inflation Reduction Act into law, which includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. The Company does not anticipate these provisions to have a material impact on its consolidated financial statements.

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.