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Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Net (loss) income before income taxes for the years ended December 31, 2024, 2023, and 2022 was as follows:
Year Ended December 31,
(in thousands)202420232022
United States$(18,787)$(22,844)$(22,651)
Foreign198159150
Total$(18,589)$(22,685)$(22,501)
For the years ended December 31, 2024, 2023, and 2022, the provision for income taxes consisted of the following:
Year Ended December 31,
(in thousands)202420232022
Current
U.S. Federal$—$—$—
State121437
Foreign32——
Total current expense$44$14$37
Deferred
U.S. Federal———
State———
Foreign———
Total deferred expense———
Total provision for income taxes$44$14$37
The reconciliation of the U.S. federal statutory rate to the Company’s effective rate is as follows:
Year Ended December 31,
202420232022
Income tax benefit using U.S. federal statutory rate21.0%21.0%21.0%
State income taxes, net of federal benefit0.64.15.0
Nondeductible expenses(1.0)(0.5)(0.3)
Unrecognized tax benefits(16.5)——
Research credits4.00.20.1
Sale of Design Manager——(2.2)
Stock-based compensation(7.4)(3.1)(0.3)
Change in the valuation allowance4.6(21.2)(23.5)
Executive compensation(5.0)(0.2)—
Other(0.6)(0.4)—
Provision for income taxes(0.3)%(0.1)%(0.2)%
When compared to the U.S. statutory tax rate of 21.0%, the effective rate of (0.3)% for the year ended December 31, 2024 was due primarily to the changes in valuation allowance, changes in uncertain tax positions, executive compensation, and non-deductible expenses.
When compared to the U.S. statutory tax rate of 21.0%, the effective rate of (0.1)% for the year ended December 31, 2023 was due primarily to the changes in valuation allowance, state taxes, and stock compensation.
When compared to the U.S. statutory tax rate of 21.0%, the effective rate of (0.2)% for the year ended December 31, 2022 was due primarily to the changes in valuation allowance, state taxes, and Sale of Design Manager.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The significant components of the Company’s deferred income tax assets and liabilities at December 31, 2024 and 2023 were comprised of the following:
Year Ended December 31,
(in thousands)20242023
Deferred tax assets
Net operating losses$34,277$31,710
Research credits7693,092
Property and equipment323363
Intangible assets and goodwill8641,074
Capitalized research and development expense9,9689,630
Operating lease liabilities5,6275,541
Stock-based compensation1,2202,295
Other1,5331,903
Total deferred tax assets$54,581$55,608
Valuation allowance(48,978)(49,814)
Net deferred tax assets$5,603$5,794
Deferred tax liabilities
Capitalized internal-use software(503)(674)
Right-of-use assets(5,010)(4,968)
Other(90)(152)
Total deferred tax liabilities$(5,603)$(5,794)
Net deferred tax liabilities$—$—
A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company considered all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax-planning strategies in assessing the need for a valuation allowance. As of December 31, 2024 and 2023, the Company believe it is more likely than not that the net deferred tax assets will not be realizable. Accordingly, the Company has applied a valuation allowance against its net deferred tax assets. The net change in the total valuation allowance for the years ended December 31, 2024 and 2023 was a decrease of approximately $0.8 million and increase of approximately $4.9 million, respectively.
The activity in the Company’s valuation allowance for the years ended December 31, 2024 and 2023, was as follows:
Year Ended December 31,
(in thousands)20242023
Valuation allowance at beginning of year$49,814$44,951
(Decrease) Increases recorded to provision for income taxes(825)4,887
Decreases recorded to equity(11)(24)
Valuation allowance at end of year$48,978$49,814
At December 31, 2024, the Company had approximately $123.0 million and $128.5 million of federal and state net operating loss (“NOL”) carryforwards, respectively. Approximately $52.6 million of the federal NOL and $81.4 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 2031 and 2037 for federal and state income tax purposes. The post 2017 NOLs are subject to an indefinite carryforward period; therefore, $70.4 million of federal NOLs generated after 2017 may be carried forward indefinitely. As it pertains to the approximately $47.1 million of state NOLs generated after 2017, not all states have conformed to the Tax Cuts and Jobs Act of 2017; therefore, some state’s NOLs are unlimited while some will expire based on the respective state. The Company also has federal and state tax credits relating to research and development credits of $4.9 million and less than $0.1 million, which begin to expire in 2031.
The utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“IRC”), a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company completed formal studies through December 31, 2022 to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred. As a result of the studies, the Company determined that although it experienced an ownership change on July 28, 2015, the limitation from the ownership change will not result in any of the NOLs or tax credits expiring unutilized. No additional ownership changes have occurred through the date of the most recent study. The Company is in the process of updating the formal study through December 31, 2024 to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred.
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in its foreign subsidiary are indefinitely invested. The Company’s current intention is to permanently reinvest undistributed earnings of our foreign subsidiary. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment.
As of December 31, 2024 and 2023, the Company had unrecognized tax benefits of $4.1 million and $1.0 million, respectively, which, if recognized, would not impact the Company’s tax provision and effective income tax rate due to a full valuation allowance. 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, 2024 and 2023, the Company had not accrued interest or penalties related to unrecognized tax benefits. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Year Ended December 31,
(in thousands)20242023
Gross tax contingencies as of beginning of year$1,031$1,022
Additions for tax positions related to the current year849
Additions for tax positions of prior years2,976—
Gross tax contingencies as of end of year$4,091$1,031
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, foreign jurisdictions, and various state and local jurisdictions. The Company’s federal and state tax returns for the tax years ended December 31, 2020 and forward generally remain subject to examination from the Internal Revenue Service and state tax authorities. However, the federal and state tax authorities can generally reduce a net operating loss (but not create taxable income) for a period outside the statutes of limitations in order to determine the correct amount of net operating loss which may be allowed as a deduction against income for a period within the statutes of limitations. Therefore, the Company’s tax years generally remain open to examination for all federal and state income tax matters until its net operating loss carryforwards are utilized and the respective statutes of limitations have lapsed. The returns in U.S. and state jurisdictions have varying statutes of limitations.
The Company’s income tax returns for December 31, 2020 through December 31, 2024 for their foreign subsidiaries remain subject to examination by tax authorities