Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

13.    Income Taxes

The Company's effective tax rates for the years ended December 31, 2021, 2020, and 2019 differ from the U.S. federal statutory rate as follows:

	December 31,
	2021				2020				2019
	(in thousands, except percentages)
U.S. federal taxes (benefit) at statutory rate	$	(98,931)	(21.00)	%	$	(48,226)	(21.00)	%	$	(25,794)	(21.00)	%
State tax expense		(29,206)	(6.20)	%		(10,672)	(4.65)	%		(6,607)	(5.38)	%
Research and development credits		(9,193)	(1.95)	%		(3,964)	(1.73)	%		(1,645)	(1.34)	%
Stock-based compensation		(46,128)	(9.80)	%		(23,791)	(10.36)	%		(7,544)	(6.14)	%
Foreign tax		167	0.04	%		55	0.02	%		1,612	1.31	%
Other nondeductible items		344	0.07	%		792	0.35	%		769	0.63	%
Nondeductible officers' compensation		24,387	5.18	%		8,984	3.91	%		609	0.50	%
Acquisition costs		8,901	1.89	%		—	—	%		—	—	%
Change in valuation allowance		150,277	31.90	%		76,920	33.50	%		40,599	33.05	%
Provision for income taxes	$	618	0.13	%	$	98	0.04	%	$	1,999	1.63	%

During the year ended December 31, 2021, the Company recorded total income tax expense of $0.6 million. The Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign country, which contributed to a foreign income tax expense of $0.3 million. Total income tax expense also included a state income tax expense of $0.3 million for the year ended December 31, 2021.

During the year ended December 31, 2020, the Company recorded total income tax expense of $0.1 million. The Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign country, which contributed to a foreign income tax expense of $0.1 million. Total income tax expense also included a state income tax benefit of $9,000 for the year ended December 31, 2020. During the year ended December 31, 2019, the Company recorded total income tax expense of $2.0 million, which included a foreign withholding tax expense of $1.9 million, foreign income tax expense of $0.1 million and state income tax benefit of $0.04 million.

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carryforwards. The components of the net deferred income tax assets are as follows:

	December 31,
	2021		2020
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	315,552	$	177,899
Intangibles		4,443		—
Research and development tax credit carryforwards		38,725		24,332
Reserves and accruals		14,098		21,770
Lease Liabilities		16,843		7,123
Deferred revenue		6,363		6,386
Stock-based compensation		15,928		10,673
Total deferred tax assets before valuation allowance		411,952		248,183
Less: valuation allowance		(396,079)		(222,521)
		15,873		25,662
Deferred tax liabilities:
Convertible debt		—		(19,143)
Right-of-use lease assets		(15,873)		(6,519)
Net deferred tax assets	$	—	$	—

The Company established a full valuation allowance against its net deferred tax assets in 2021 and 2020 due to the uncertainty surrounding realization of these assets. The valuation allowance increased to $396.1 million as of December 31, 2021 from $222.5 million as of December 31, 2020 due to current year losses and credits claimed.

As of December 31, 2021, the Company had federal, state, and foreign net operating loss (“NOLs”) carryforwards of approximately $1.3 billion, $796.7 million, and $4.0 million, respectively, which begin to expire in 2027, 2028, and 2031, respectively, if not utilized. Approximately $950.2 million of federal net operating loss included above can be carried forward indefinitely.

The Company also had federal research and development credit carryforwards of approximately $34.5 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $23.0 million, which can be carried forward indefinitely. Realization of these deferred tax assets would require $1.5 billion in taxable income to fully utilize. Realization is dependent on generating sufficient taxable income prior to expiration of the loss and credit carryforwards.

Federal, state and foreign tax laws impose substantial restrictions on the utilization of NOLs and credit carryforwards in the event of an "ownership change" for tax purpose, as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company's ability to utilize these carryforwards may be limited as the result of such ownership change. Such a limitation could result in limitation in the use of the NOLs in future years and possibly a reduction of the NOLs available.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

	December 31,
	2021		2020		2019
	(in thousands)
Balance at beginning of year	$	11,500	$	8,619	$	7,362
Additions based on tax positions related to the current year		6,017		2,889		1,426
Additions (reductions) for tax positions of prior years		(3)		(8)		(169)
Balance at end of year	$	17,514	$	11,500	$	8,619

During the years ended December 31, 2021, 2020, and 2019, the amount of unrecognized tax benefits increased $6.0 million, $2.9 million, and $1.3 million, respectively, due to additional research and development credits generated during the year. As of December 31, 2021, 2020, and 2019, the total amount of unrecognized tax benefits was $17.5 million, $11.5 million, and $8.6 million, respectively. The reversal of the uncertain tax benefits would not affect the Company's effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets.

The Company is subject to U.S. federal, state, and foreign income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations, and require significant judgment to apply. The Company is subject to U.S. federal, state and local tax examinations by tax authorities for all prior tax years since incorporation. The Company does not anticipate significant changes to its current uncertain tax positions through December 31, 2022.

The Company recognizes any interest and/or penalties related to income tax matters as a component of income tax expense.  As of December 31, 2021, there were no accrued interest and penalties related to uncertain tax positions.