Income taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

Income (loss) before income taxes for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):

	Year Ended December 31,
	2022		2021		2020
Domestic	$	(139,295)	$	(96,956)	$	(106,508)
Foreign	1,040		181		103
Total	$	(138,255)	$	(96,775)	$	(106,405)

The components of income tax expense are as follows (in thousands):

	Year Ended December 31,
	2022		2021		2020
Current:
Federal	$	—	$	—	$	—
State	62		1		1
Foreign	243		36		23
Total current expense	305		37		24
Deferred:
Federal	—		(2,185)		—
State	—		(646)		351
Foreign	—		—		—
Total deferred (benefit) expense	—		(2,831)		351
Total income tax expense (benefit)	$	305	$	(2,794)	$	375

A reconciliation between the statutory U.S. federal rate and the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2022		2021		2020
Tax at federal statutory rate	$	(29,034)	$	(20,323)	$	(22,344)
State income taxes, net of federal benefit	57		(644)		1,330
Stock compensation	5,587		1,271		2,786
Foreign rate differential	25		(2)		—
Tax credits	(539)		(539)		(539)
Fair value changes - warrants	(1,564)		(619)		11,192
Valuation allowance	25,666		20,058		(6,812)
Non-deductible expenses	78		(2,031)		(485)
Convertible debt cancellation of indebtedness income	—		—		15,079
Other	29		35		168
Total tax provision (benefit)	$	305	$	(2,794)	$	375

Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):

	Year Ended December 31,
	2022		2021
Deferred tax assets:
Net operating loss carryforwards	$	43,990	$	42,721
Credits	4,828		3,955
Stock based compensation	3,653		2,826
Accruals and reserves	1,748		1,248
Fixed assets	2,771		991
Operating lease liability	3,631		4,360
Capitalized research and development expenditures	15,875		—
Gross deferred tax assets	76,496		56,101
Valuation allowance	(69,608)		(47,420)
Net deferred tax assets	6,888		8,681
Deferred tax liabilities:
Intangible property	(4,077)		(5,287)
Operating lease, right of use assets	(2,811)		(3,394)
Gross deferred tax liabilities	(6,888)		(8,681)
Net deferred tax assets	$	—	$	—

The Company has established a full valuation allowance of $69.6 million and $47.4 million for the years ended December 31, 2022 and 2021, respectively, against its net deferred tax assets. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has generated in the past, the Company believes that it is not more likely than not that all of the deferred tax assets can be realized as of December 31, 2022. Accordingly, the Company has recorded a full valuation allowance on its deferred tax assets.

The valuation allowance on the Company’s net deferred taxes increased by $22.2 million and $28.1 million during the years ended December 31, 2022 and 2021, respectively. The increase in valuation allowance is primarily attributable to the generation of net operating losses and capitalization of research and development expenditures, which became enacted for tax year beginning after December 31, 2021, during 2022.

As of December 31, 2022, the Company had federal net operating loss carryforwards and state net operating loss carryforwards of approximately $246.2 million and $124.9 million, respectively. As of December 31, 2022, federal net operating loss carryforwards generated after December 31, 2017 will be carried forward indefinitely and the state net operating loss carryforward begins expiring in 2031 through 2042. As of December 31, 2022, the amount of federal net operating loss that does not expire is $237.7 million.

As of December 31, 2021, the Company had federal net operating loss carryforwards and state net operating loss carryforwards of approximately $224.4 million and $146.8 million, respectively. As of December 31, 2021, federal net operating loss carryforwards generated after December 31, 2017 will be carried forward indefinitely and the state net operating loss carryforward begins expiring in 2035. As of December 31, 2021, the amount of federal net operating loss that does not expire is $215.9 million.

As of December 31, 2022, the Company had federal and state research and development credit carryforwards of approximately $4.7 million and $2.9 million, respectively. As of December 31, 2021, the Company had federal and state research and development credit carryforwards of approximately $4.0 million and $2.3 million, respectively. As of December 31, 2022 the federal credits will expire starting in 2035, if not utilized and state credits carryforward indefinitely.

The Tax Reform Act of 1986 and similar state legislation impose substantial restrictions on the utilization of the net operating losses and tax credit carryforwards in the event there is a change in ownership as provided by Section 382 and Section 383 of the Internal Revenue Code and similar state provisions. Such ownership change could result in the limitation and /or expiration of the net operating loss and tax credit carryforwards before utilization, which could result in increased future tax liabilities. While the Company has experienced ownership shifts, there has been no limitation or loss of tax attributes as of December 31, 2022.

Beginning January 1, 2022, the Tax Cuts and Jobs Act (the "Tax Act”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenditures pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized research and development expenditures are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the Tax Act, deferred tax assets related to capitalized research expenditures increased by $15.9 million.

ASC 740, Income Taxes (“ASC 740”), requires that the tax benefit of net operating losses, 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. As of December 31, 2022 and 2021 the Company has reviewed the positive and negative evidence relating to the realizability of the deferred tax assets and has concluded that the deferred tax assets are more likely than not to not be realized.

The balance of gross unrecognized tax benefits as of December 31, 2022, and 2021 was $18.8 million and $18.5 million, respectively. Out of the total unrecognized tax benefits, $0.1 million at December 31, 2022, if recognized, would impact our effective tax rate in the period of recognition. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2022 and 2021, the Company has not accrued interest and penalties related to uncertain tax positions. The following table sets forth the change in the uncertain tax positions for the years ended December 31, 2022, 2021 and 2020 (in thousands):

	Year Ended December 31,
	2022		2021		2020
Balance at the beginning of the year	$	18,534	$	971	$	651
Decreases:
For current year’s tax positions	—		—		—
For prior years’ tax positions	(64)		—		—
Increases:
For current year’s tax positions	320		551		320
For prior years’ tax positions	22		17,012		—
Balance at the end of the year	$	18,812	$	18,534	$	971

The Company files income tax returns in the U.S. for Federal, California, and other US states, as well as miscellaneous foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Company has not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2022, its federal returns for the years ended December 31, 2016 through the current period and the state

returns for the years ended December 31, 2016 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carry-forwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would begin in the year of the utilization.