Income taxes

12 Months Ended

Dec. 31, 2021

Income taxes

Income taxes

10.           Income taxes

During the years ended December 31, 2021, 2020 and 2019, the Company recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated in each period due to its uncertainty of realizing a benefit from those items. All of the Company’s operating losses since inception have been generated in the United States.

A summary of the Company’s current and deferred tax provision is as follows:

	Year Ended December 31,
	2021		2020		2019
Current income tax provision:
Federal	$	—	$	—	$	—
State		—		—		24
Total current income tax provision		—		—		24
Deferred income tax benefit:
Federal		23,352		(17,580)		(9,400)
State		7,274		(3,135)		688
Total deferred income tax benefit		30,626		(20,715)		(8,712)
Change in deferred tax asset valuation allowance		(30,626)		20,715		8,712
Total provision for income taxes	$	—	$	—	$	24

The $24 provision for income taxes for the year ended December 31, 2019 was classified within general and administrative expense on the Consolidated Statements of Operations and Comprehensive Loss.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2021		2020		2019
Federal statutory income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	7.2		4.0		(1.6)
Research and development tax credits	2.0		1.3		1.9
Other permanent differences	(0.1)		(0.1)		0.1
Change in deferred tax asset valuation allowance	(30.1)		(26.2)		(19.9)
Effect of Section 382 limitation	-		-		(1.5)
Effective income tax rate	-	%	-	%	-	%

Net deferred tax assets as of December 31, 2021 and 2020 consisted of the following:

	December 31,
	2021		2020
Deferred tax assets:
Net operating loss carry forwards	$	56,128	$	29,951
Research and development tax credit carry forwards		4,522		2,096
License fees		3,523		3,364
Stock based compensation		3,716		1,402
Accruals, reserves and other		151		63
		68,040		36,876
Valuation allowance		(66,853)		(36,227)
Net deferred tax assets		1,187		649
Deferred tax liabilities:
Prepaid expenses		(1,187)		(649)
Net deferred tax liabilities		(1,187)		(649)

As of December 31, 2021, the Company had U.S. federal and state net operating loss carryforwards of $222,397 and $137,004, respectively, which may be available to offset future taxable income and begin to expire in 2037. The federal net operating loss carryforwards include $219,953, which may be carried forward indefinitely. As of December 31, 2021, the Company also had U.S. federal and state research and development tax credit carryforwards of $5,388 and $565, respectively, which may be available to offset future tax liabilities and begin to expire in 2033. During the year ended December 31, 2021, gross deferred tax assets, before valuation allowance, increased by $30,626, due to the operating loss incurred by the Company during that period.

Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income or tax liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The annual limitation is determined by multiplying the value of the Company's stock at the time of such ownership change by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. As of December 31, 2021, the Company determined that ownership changes occurred on March 24, 2017, June 7, 2018 and July 8, 2020. As a result of the ownership changes, approximately $2,118 and $3,632 of the NOLs will expire unutilized for federal and state purposes, respectively. The ability of the Company to use its remaining NOL carryforwards may be further limited if the Company experiences a Code Section 382 ownership change as a result of future changes in its stock ownership.

The Company’s research and development credits are subject to Code Section 383 and are limited due to the ownership changes that the Company has experienced. As of December 31, 2021, the Company has derecognized approximately $87 and $43 of gross federal and state research and development credits, respectively. The Company has not derecognized any of the California research and development credit-related deferred tax assets because the credits do not expire.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize its deferred tax assets at each reporting period. In doing so, the Company has considered its history of cumulative net losses incurred and its lack of commercialization of any products or generation of any revenue from product sales and has concluded

that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been recorded against the net deferred tax assets as of December 31, 2021 and 2020. Management reevaluates the positive and negative evidence at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2021 and 2020 are as follows:

	2021		2020
Valuation allowance as of January 1,	$	(36,227)	$	(15,512)
Increases recorded to income tax provision				—
Decreases recorded as a benefit to income tax provision		(30,626)		(20,715)
Valuation allowance as of December 31,	$	(66,853)	$	(36,227)

As of December 31, 2021, the Company had gross unrecognized tax benefits of $1,313, none of which if recognized, would reduce the effective tax rate in a future period, due to the Company's full valuation allowance on U.S. net deferred tax assets.  The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2021, the Company had not accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s consolidated statements of operations and comprehensive loss. For the year ended December 31, 2021, the Company will file income tax returns in the U.S., California, Connecticut, Illinois, Massachusetts, Maryland, New York, North Carolina and Pennsylvania, as prescribed by the tax laws of the jurisdictions in which it operates. The Company is subject to examination by federal and state jurisdictions, where applicable.  There are currently no pending tax examinations.  The Company is open to future tax examination under statute from 2017 to the present.

A reconciliation of the beginning and ending unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019 is as follows

Balance at December 31, 2018	$	—
Increases related to current year tax positions		237
Balance at December 31, 2019	$	237
Increases related to current year tax positions		407
Balance at December 31, 2020	$	644
Increases related to prior year tax positions		66
Increases related to current year tax positions		603
Balance at December 31, 2021	$	1,313

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” (the “Act”) was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company analyzed the provisions of the Act and determined there was no significant impact to its income taxes for the year ended December 31, 2021.

On June 29, 2020, the Governor of California signed Assembly Bill 85 (“A.B. 85”), which includes several tax measures, provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5,000 of tax per year. Generally, A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021, and 2022 for taxpayers with taxable income of

$1,000 or more. Since the Company is not expected to generate California source taxable income of more than $1,000, no material impact is anticipated at this time.

On December 27, 2020, the “Consolidated Appropriations Act, 2021” (the “CAA”) was signed into law. The CAA includes provisions meant to clarify and modify certain items put forth in the CARES Act, while providing aid to businesses affected by the COVID-19 pandemic. The CAA allows deductions for expenses paid for by Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) Program, clarifies forgiveness of EIDL advances, and other business provisions. The Company analyzed the provisions of the CAA and determined there was no significant impact to its 2021 and 2020 tax provision.

On January 1, 2021, the Company adopted Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). This new guidance simplifies the accounting for income taxes by removing certain exceptions to general principles, clarifying requirements and including amendments to improve consistent application of the guidance. The guidance specifically removes the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items, such as discontinued operations or other comprehensive income. The guidance also requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and to account for any other amounts incurred as a non-income based tax. The guidance is effective for the Company beginning January 1, 2021 using a prospective approach. Historically, the Company has included capital and gross receipts-based taxes as above the line taxes. Thus, the adoption will have no material impact to the Company. Additionally, the changes to the intraperiod allocation and treatment of discontinued operations or other comprehensive income have no impact to the Company.