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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes

13. Income Taxes

 

The components of loss before income tax provision (benefit) for the years ended December 31, 2022 and 2021 consisted of the following (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2022

 

 

2021

 

U.S.

 

 

(60,403

)

 

 

(37,705

)

Foreign

 

 

(2,025

)

 

 

(1,347

)

 

 

$

(62,428

)

 

$

(39,052

)

 

The Company has not recorded a current or deferred tax expense or benefit for the years ended December 31, 2022 and 2021.

 

The following is a reconciliation of the expected statutory federal income tax provision to our actual income tax provision for the years ended December 31, 2022 and 2021 (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2022

 

 

2021

 

Income taxes at statutory rates

 

$

(13,110

)

 

$

(8,201

)

State income tax, net of federal benefit

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

533

 

 

 

451

 

Permanent items

 

 

128

 

 

 

31

 

Federal research and orphan drug credits

 

 

(1,152

)

 

 

(1,713

)

Foreign rate differential

 

 

425

 

 

 

72

 

Transaction costs

 

 

89

 

 

 

-

 

Acquired in-process research and development

 

 

4,840

 

 

 

-

 

Change in federal valuation allowance

 

 

8,247

 

 

 

9,360

 

 

 

$

-

 

 

$

-

 

 

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, 2022 and 2021 are as follows (in thousands):

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforward

 

$

28,222

 

 

$

19,344

 

Credits

 

 

9,289

 

 

 

3,940

 

Capitalized research expenditures

 

 

7,086

 

 

 

-

 

Equity compensation

 

 

1,829

 

 

 

1,134

 

Other

 

 

1,196

 

 

 

1,184

 

Total deferred tax assets

 

 

47,622

 

 

 

25,602

 

Valuation allowance

 

 

(46,317

)

 

 

(25,215

)

Total deferred tax assets, net of allowance

 

$

1,305

 

 

$

387

 

Deferred tax liabilities:

 

 

 

 

 

 

Operating lease right-of-use asset

 

 

(284

)

 

 

(346

)

Deferred revenue

 

 

(945

)

 

 

-

 

Other

 

 

(76

)

 

 

(41

)

Total deferred tax liabilities

 

$

(1,305

)

 

$

(387

)

Net deferred taxes

 

$

-

 

 

$

-

 

 

The Company has established a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets. 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 assets are realizable, the valuation allowance will be reduced. The Company has recorded a full valuation allowance of $46.3 million as of December 31, 2022 as it does not believe it is more likely than not that certain deferred tax assets will be realized primarily due to the generation of pre-tax book losses in the current year, 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 approximately $21.1 million during the year ended December 31, 2022.

At December 31, 2022, the Company had federal and California tax loss carryforwards of approximately $116.4 million and $90.6 million, respectively. The federal net operating loss carryover includes $112.7 million of net operating losses generated subsequent to 2017. Federal net operating losses generated after December 31, 2017 carryover indefinitely but the deductibility of such federal net operating losses is limited to 80% of taxable income. The federal net operating losses generated prior to 2018 as well as the state net operating loss carryforwards, begin to expire in 2037 unless previously utilized. The Company has $2.5 million of Australian net operating loss carryforwards as of December 31, 2022 that are carried forward indefinitely.

At December 31, 2022, the Company had federal and state tax credit carryforwards of approximately $7.2 million and $2.6 million, respectively, after reduction for uncertain tax positions. The Company has not performed a formal research and development credit study with respect to these credits. The federal credits will begin to expire in 2037, if unused, and the state credits carryforward indefinitely.

Pursuant to the Internal Revenue Code of 1986, as amended (IRC), specifically Section 382 and 383, the Company’s ability to use net operating loss and research and development tax credit carryforwards (tax attribute carryforwards) to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year testing period. The Company has not completed an ownership change analysis pursuant to IRC Section 382. If ownership changes within the meaning of IRC Section 382 are identified as having occurred, the amount of remaining tax attribute carryforwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated, including those acquired through Bioniz. Further, our deferred tax assets associated with such tax attributes could be significantly reduced or eliminated upon realization of an ownership change within the meaning of IRC Section 382. 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 ownership changes, if any, will not impact our effective tax rate.

The following table summarizes the reconciliation of the unrecognized tax benefits activity during the years ended December 31, 2022 and 2021 (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2022

 

 

2021

 

Unrecognized tax benefits – beginning

 

$

5,487

 

 

$

2,667

 

Gross increases – tax positions in prior period

 

 

-

 

 

 

2,266

 

Gross decreases – tax positions in prior period

 

 

-

 

 

 

-

 

Gross increase – current-period tax positions

 

 

392

 

 

 

554

 

Gross decrease – current-period tax positions

 

 

-

 

 

 

-

 

Settlements

 

 

-

 

 

 

-

 

Lapse of statute of limitations

 

 

-

 

 

 

-

 

Unrecognized tax benefits – ending

 

$

5,879

 

 

$

5,487

 

 

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance. The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company's consolidated balance sheet as of December 31, 2022 and has not recognized interest and/or penalties in the consolidated statement of operations for the year ended December 31, 2022.

All tax years for both federal and state purposes remain open and subject to examination by tax jurisdictions.

The 2017 tax reform act amended the IRC, effective for amounts paid or incurred in tax years beginning after December 31, 2021, to eliminate the immediate expensing of research and experimental (R&E) expenditures and require taxpayers to charge their R&E expenditures and software development costs (collectively, R&E expenditures) to a capital account. Capitalized costs are required to be amortized over five years (15 years for expenditures attributable to foreign research).