Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 13. Income Taxes

The Company records income tax expense related to profits realized by its U.S. operating subsidiaries. For the years ended December 31, 2022, 2021 and 2020, no income tax expense was recorded due the group’s net operating loss (“NOL”) and full valuation allowance.

The rate reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate for the years ended December 31, 2022, 2021 and 2020 are as follows:

	December 31,
	2022		2021		2020
Tax effect at statutory rate	21.0	%	21.0	%	21.0	%
State taxes	6.4	%	10.6	%	5.8	%
Stock compensation	0.1	%	9.6	%	(0.9)	%
Permanent differences	0.0	%	0.0	%	0.0	%
Federal research and development credits	1.5	%	7.7	%	3.6	%
Other	(1.8)	%	(5.1)	%	(0.7)	%
Change in valuation allowance	(27.2)	%	(43.8)	%	(28.8)	%
Total	0.0	%	0.0	%	0.0	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes are as follows (in thousands):

	December 31,
	2022			2021
Deferred Tax Assets:
Federal net operating loss carryforwards	$	32,320		$	25,957
State net operating loss carryforwards		8,835			6,651
Research and development credit carryforwards		17,581			14,611
Lease liabilities		4,011			4,285
Deferred revenue		16,315			27,130
Accruals and reserves, stock and other		10,350			5,156
Capitalized Research and Development		36,435			0
Total deferred tax assets	$	125,847		$	83,790
Valuation allowance	$	(120,096	)	$	(77,990	)
Deferred tax assets	$	5,751		$	5,800
Fixed and intangible assets		(2,187	)		(1,941	)
Right-of-use assets		(3,564	)		(3,859	)
Net deferred tax asset	$	—		$	—

As required by ASC 740, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are composed principally of NOL carryforwards and research and development credit carryforwards. Management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, and, as a result, a valuation allowance of $120.1 million and $78.0 million has been established at December 31, 2022 and 2021, respectively. During 2022, the valuation allowance increased by $42.1 million primarily due to the increase in the Company’s NOL during the period.

Beginning in 2022, Tax Cuts and Jobs Act (TCJA) amended Section 174 and now requires U.S.-based and non-U.S-based research and experimental (R&E) expenditures to be capitalized and amortized over a period of five or 15 years, respectively, for amounts paid in tax years starting after December 31, 2021. Prior to the TCJA amendment, Section 174 allowed taxpayers to immediately deduct R&E expenditures in the year paid or incurred. The Company has applied this required change in accounting method beginning in 2022 and the computation may be adjusted pending future IRS guidance.

The Company has incurred NOLs from inception. At December 31, 2022 and 2021, the Company has federal NOL carryforwards of approximately $153.9 million and $123.6 million, respectively, and state NOL carryforwards of approximately $139.8 million and $105.2 million, respectively. Of the federal net operating loss carryovers, $144.1 million is not subject to expiration and the remaining federal and state NOLs begin to expire in 2036. These loss carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.

Utilization of net operating loss and research and development credit carryforwards may generally be subject to limitation under Sections 382 and 383 of the Internal Revenue Code due to ownership changes that have occurred previously, or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset any post-ownership change taxable income and tax, respectively. The latest Section 382 study was performed through December 31, 2022, noting that historic ownership changes have likely occurred. Nonetheless, the Company has determined that as of December 31, 2022 the prospective utilization of all net operating loss and tax credit carryforwards generated from inception through December 31, 2022, and therefore the corresponding Federal and Massachusetts deferred tax assets, should not be restricted by Sections 382 and 383, although ownership changes after December 31, 2022 could impact the Company’s ability to utilize these tax attributes in the future.

At December 31, 2022 and 2021 the Company had federal research and development credit carryforwards of $12.7 million and $10.4 million, respectively, and state research and development credit carryforwards of $6.1 million and $5.2 million, respectively. These carryforwards begin to expire in 2031.

The Company follows the provisions of ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which specifies how tax benefits for uncertain tax positions are to be recognized, measured, and recorded in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. As of December 31, 2022, and 2020, the Company has not recorded any amounts for uncertain tax positions. The Company’s policy is to recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any, in its statements of income. As of December 31, 2022 and 2021, the Company had no reserves for uncertain tax positions. For the years ended December 31, 2022 and 2021, no estimated interest or penalties were recognized on uncertain tax positions.

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

The Company's tax returns for the years ended December 31, 2019 to December 31, 2022 remain open and subject to examination by the Internal Revenue Service and state taxing authorities.