Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

10. Income Taxes

The Company had no income tax expense for the years ended December 31, 20

or 20

. The

Company’s

foreign

operations

have not been significant

and therefore,

the Company

has not provided for any foreign taxes. 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,
	2020			2019
Federal statutory income tax rate		21.0	%		21.0	%
State taxes, net of federal benefit		4.2			5.5
Federal and state research and development tax credits		12.4			19.4
Nondeductible items		(0.7	)		(1.6	)
Stock-based compensation		97.2			13.3
Other		2.2			(0.9	)
Change in valuation allowance		(136.3	)		(56.7	)

Effective income tax rate		—	%		—	%

Net deferred tax assets as of December 31, 2020 and 2019 consisted of the following (in thousands):


	December 31,
	2020			2019
Deferred tax assets:
Net operating loss carryforwards	$	19,197		$	8,165
Research and development tax credit carryforwards		6,470			5,040
Accrued expenses and other current liabilities		566			671
Intangible assets		1,598			33
Property and equipment		220			215
Stock-based compensation		3,092			1,463
Operating lease liability		2,829			—
Other		221			725

Total deferred tax assets		34,193			16,312
Valuation allowance		(30,558	)		(15,292	)

Net deferred tax assets		3,635			1,020

Deferred tax liabilities:
Capitalized software development costs		(1,088	)		(1,020	)
Operating lease right-of-use assets		(2,547	)		—

Deferred tax liabilities		(3,635	)		(1,020	)

Net deferred tax assets and liabilities	$	—		$	—

As of December 31, 2020, the Company had federal net operating loss carryforwards of $72.9 million, which may be available to offset future taxable income, of which $9.0 million of the total net operating loss carryforwards expire at various dates beginning in 2029, while the remaining $63.9 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2020, the Company had state net operating loss carryforwards of $60.7 million, which may be available to offset future taxable income and expire at various dates beginning in 2027. As of December 31, 2020, the Company also had federal and state research and development tax credit carryforwards of $4.5 million and $2.4 million, respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2030 and 2029, respectively.

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 Section 382 and Section 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 and 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. In 2019, the Company performed an analysis of the ownership changes as defined within IRC §382(g) during the period beginning with the first issuance of the Company’s stock on August 8, 2008 through June 30, 2019. It was determined that it is more likely than not that the Company did not undergo an ownership change within the meaning of IRC §382(g) during the analysis period. Therefore net operating losses for that period are not limited and will be available to cover future taxable income.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised primarily of net operating loss carryforwards and research and development tax credit carryforwards. Management has considered the Company’s history of cumulative net losses incurred since inception, estimated future taxable income and prudent and feasible tax planning strategies and has concluded that it is more likely than not that the Company will not realize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2020 and 2019. The Company reevaluates the positive and negative evidence at each reporting period.

The change in the valuation allowance for deferred tax assets during the years ended December 31, 2020 and 2019 related primarily to an increase in net operating loss carryforwards and research, development tax credit carryforwards and stock-based compensation expense. The changes in the valuation allowance were as follows (in thousands):


	Year Ended December 31,
	2020		2019
Valuation allowance as of beginning of year	$	15,292	$	11,257
Increases recorded to tax provision		15,266		4,035

Valuation allowance as of end of year	$	30,558	$	15,292

The Company assesses the uncertainty in its income tax positions to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the

more-likely-than-not

threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. No reserve for uncertain tax positions or related interest and penalties has been recorded at December 31, 2020 and 2019.

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. There are currently no pending tax examinations. The Company is open to future tax examination under statute from 2017 to the present, however, carryforward attributes that were generated prior to January 1, 2017 may still be adjusted upon examination by federal, state or local tax authorities if they either have been or will be used in a future period.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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