Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Taxes
11. Income Taxes
No provision for federal or state income taxes was recorded during the years ended December 31, 2021 and 2020, as the Company incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax benefit for the years ended December 31, 2021 and 2020 differs from the amount that would result from applying the domestic federal statutory rates to pretax losses primarily because of changes in the valuation allowance, state taxes, and the generation of research and development credits.
A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):
 
    
Year Ended December 31,
  
    
2021
    
2020
  
Income at U.S. statutory rate
    $ (8,530 )       21.00 %    $  912        21.00 %
State taxes, net of federal benefit
      (2,578 )       6.35 %      (1,583 )       -36.45 % 
Change in fair value
      (2,627 )       6.47 %      (14,047 )       -323.39 % 
Interest Expense
      1,077        -2.65 %      1,410        32.46 % 
Stock compensation
      70        -0.17 %      127        2.93 % 
Transaction costs
      (664 )       1.64 %      —          0.00 % 
Permanent differences and other
      1        0.00 %      6        0.13 % 
Valuation allowance
      13,251        -32.62 %      13,175        303.32 % 
    
 
 
     
 
 
    
 
 
     
 
 
  
       —          0.00 %      —          0.00 % 
    
 
 
     
 
 
    
 
 
     
 
 
  
The net deferred income tax asset balance related to the following:
 
    
Years Ended December 31,
  
    
2021
     
2020
  
Deferred tax assets
                  
Stock compensation
    $ 10      $ 64  
Accruals and other
      6,507        4,151  
Debt discount
      597        483  
Royalty liability
      —          2,272  
Net operating loss carryforwards
      62,606        51,981  
Tax credits
      6,731       
6,774
  
    
 
 
     
 
 
  
Total deferred tax assets
      76,451        65,662  
Less: valuation allowance
      (76,451 )       (65,662 ) 
    
 
 
     
 
 
  
Deferred tax assets, net
    $ —        $ —    
    
 
 
     
 
 
  
At December 31, 2021, the Company had approximately $231.7 million and $202.7 million of federal and state net operating loss (“
NOL
”) carryforwards, respectively. Approximately $134.9 million of the federal NOL and $120.0 million of the state NOL was generated prior to the 2018 tax year. As a result, these net operating loss carryforwards will expire, if not utilized, between 2022 and 2037 for federal and state income tax purposes. As a result of the Tax Cuts and Jobs Act, federal NOLs generated in tax years ending after December 31, 2017 are limited to a deduction of 80% of the taxpayer’s taxable income. Furthermore, the post 2017 NOLs are subject to an indefinite carryforward period; therefore, $96.8 million of federal NOL generated after 2017 may be carried forward indefinitely. As it pertains to the approximately $82.7 million of state NOLs generated after 2017, not all states have conformed to the Act; therefore, the NOL expiration will vary based on the state. The Company also has federal tax credits of $6.7 million, which begin to expire in 2024 and state tax credits of $0.1 million which begin to expire in 2022.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2021 and 2020, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company determined that it was not possible to reasonably quantify future taxable income and determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2021 and 2020.
The Company’s valuation allowance for the year ended December 31, 2021 and 2020 is as follows:
 
    
Years Ended December 31,
  
    
2021
     
2020
  
Valuation allowance at beginning of year
    $ 65,662      $ 52,487  
Increases recorded due to income tax provisions
      13,251        13,175  
Decreases recorded to equity
      (2,462 )       —    
    
 
 
     
 
 
  
Valuation allowance at end of year
    $ 76,451      $ 65,662  
    
 
 
     
 
 
  
Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its
pre-change
NOL carryforwards and other
pre-change
tax attributes to offset its post-change income may be limited. The Company has not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since it became a “loss corporation” as defined in Section 382. Future changes in the Company’s stock ownership, which may be outside of its control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to the Company.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
The Company records uncertain tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2020 and 2021 the Company has not recorded any uncertain tax positions in its financial statements.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2021 and 2020, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The earliest tax years that remain subject to examination by jurisdiction is 2018 for both federal and state. However, to the extent the Company utilizes net operating losses from years prior to 2018, the statute remains open to the extent of the net operating losses or other credits are utilized. The resolution of tax matters is not expected to have a material effect on the Company’s financial statements.