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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

Note 13. Income taxes

 

No provision for federal, state or foreign income taxes has been recorded for the years ended December 31, 2021 and 2020.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2021 and 2020 were as follows (in thousands):

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

37,874

 

 

$

11,341

 

Intangible assets

 

 

7,464

 

 

 

5,231

 

Research and development credits

 

 

4,037

 

 

 

657

 

Operating lease liabilities

 

 

4,689

 

 

 

745

 

Contribution of common stock

 

 

4,366

 

 

 

—

 

Other, net

 

 

2,686

 

 

 

646

 

Total deferred tax assets

 

 

61,116

 

 

 

18,620

 

Deferred tax liabilities:

 

 

 

 

 

 

Property and equipment

 

 

(420

)

 

 

(293

)

Operating lease assets

 

 

(4,330

)

 

 

(555

)

Total deferred tax liabilities

 

 

(4,750

)

 

 

(848

)

Valuation allowance

 

 

(56,366

)

 

 

(17,772

)

Net deferred tax assets

 

$

—

 

 

$

—

 

 

During the year ended December 31, 2021, the Company identified an overstatement of the Company’s disclosed deferred tax assets and corresponding valuation allowance as of December 31, 2020 relating to the intangible assets arising from the Asana Merger Agreement in November 2020. The merger was a tax-free merger; therefore, the intangible assets should have had a $0 tax basis rather than the previously disclosed $12.4 million of related deferred taxes. There was no impact of this error on the consolidated balance sheets, statements of operations and comprehensive loss or cash flows as of and for the year ended December 31, 2020.

 

Management concluded that the error was not material to any prior period consolidated financial statements and has therefore corrected the disclosure as an immaterial correction by revising the deferred tax disclosure as of December 31, 2020 and the tax rate reconciliation for the year ended December 31, 2020.

 

The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced. The Company has recorded a full valuation allowance of $56.4 million as of December 31, 2021, as it does not believe it is more likely than not that the deferred tax assets will be realized primarily due to the generation of pre-tax book losses, the lack of feasible tax-planning strategies, the limited existing taxable temporary differences, and the subjective nature of forecasting future taxable income into the future. The Company increased its valuation allowance by $38.6 million during the year ended December 31, 2021.

 

A reconciliation of the federal statutory income tax rate and the Company’s effective income tax rate is as follows:

 

 

 

Year ended December 31,

 

 

 

2021

 

 

2020

 

Federal statutory income tax rate

 

 

21.0

%

 

 

21.0

%

State income taxes, net of federal benefit

 

 

6.1

 

 

 

1.3

 

Change in valuation allowance

 

 

(31.4

)

 

 

(13.5

)

Fair value of purchase right liability

 

 

0.3

 

 

 

1.5

 

In-process research and development

 

 

—

 

 

 

(10.3

)

Other permanent differences

 

 

(0.7

)

 

 

(0.1

)

Research and development credits

 

 

2.9

 

 

 

—

 

State net operating loss

 

 

2.4

 

 

 

—

 

Other

 

 

(0.6

)

 

 

0.1

 

Effective income tax rate

 

 

—

%

 

 

—

%

 

At December 31, 2021, the Company had federal, California and other state net operating loss (NOL) carryforwards of $135.0 million, $133.6 million and $3.1 million, respectively. The federal NOL carryforwards will carryforward indefinitely and can offset 80% of future taxable income each year, the California NOL carryforwards begin to expire in 2038 and the other state NOL carryforwards begin to expire in 2035.

 

At December 31, 2021, the Company also had federal, California and Massachusetts research tax credit carryforwards of approximately $3.1 million, $2.3 million and $184,000, respectively. The federal research tax credit carryforwards begin to expire in 2038, the California research tax credit carryforward does not expire and can be carried forward indefinitely until utilized and the Massachusetts research tax credit carryforwards begin to expire in 2036.

 

At December 31, 2021, the Company also had federal and California charitable contribution carryforwards of $17.5 million. The charitable contribution carryforwards begin to expire in 2024.

 

The above NOL carryforward and the research tax credit carryforwards are subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, as amended (IRC), and similar state provisions due to ownership change limitations that have occurred which will limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. If a change in ownership were to have occurred, additional NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, related to the Company’s operations in the United States will not impact the Company’s effective tax rate.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Due to the Company’s history of net operating losses, the CARES Act did not have a material impact on the Company’s income tax provision for the years ended December 31, 2021 and 2020.

 

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition at the effective date to be recognized.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2021 and 2020, excluding interest and penalties, is as follows (in thousands):

 

 

 

Year ended December 31,

 

 

 

2021

 

 

2020

 

Balance at the beginning of the year

 

$

191

 

 

$

—

 

Increase (decrease) related to prior year positions

 

 

156

 

 

 

—

 

Increase related to current year positions

 

 

835

 

 

 

191

 

Balance at the end of the year

 

$

1,182

 

 

$

191

 

 

Included in the balance of unrecognized tax benefits as of December 31, 2021 is $1.1 million that, if recognized, would reduce the Company’s annual effective tax rate, subject to valuation allowance. The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months.

 

The Company has filed income tax returns in the United States, California and Massachusetts. The Company is not currently under examination in any of these jurisdictions, and all of the Company’s tax years remain effectively open in all jurisdictions to examination due to net operating loss carryforwards. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. For the years ended December 31, 2021 and 2020, the Company has not recognized any interest or penalties related to income taxes.