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

Note 5: Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities were (in thousands):

 

 

 

Year Ended

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

5,409

 

 

$

3,031

 

Reserves, accruals and other

 

 

198

 

 

 

239

 

Depreciation and amortization

 

 

917

 

 

 

1,284

 

Deferred stock based compensation

 

 

2,691

 

 

 

2,698

 

Research and development credit carryforwards

 

 

6,675

 

 

 

6,613

 

Total deferred tax assets

 

 

15,890

 

 

 

13,865

 

Less: Valuation allowance

 

 

(15,890

)

 

 

(13,865

)

Net deferred tax assets, net

 

$

—

 

 

$

—

 

 

 

The $2.0 million increase in the valuation allowance during 2021 was primarily the result of an increase to the net operating loss carryforwards for the current year. The valuation allowance increased by $1.1 million during the year ended December 31, 2020.

 

Utilization of the Company’s net operating losses (NOLs) and tax credit carryforwards is subject to a substantial annual limitation due to the ownership change limitations provided by the IRC and similar state provisions. Section 382 of the IRC (Section 382) imposes limitations on a corporation’s ability to utilize its NOL and tax credit carryforwards, if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership percentage of certain stockholders in the stock of the corporation by more than 50% over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate.  While a formal study has not been performed, the Company believes that Section 382 ownership changes occurred as a result of financing transactions and the Arrangement.. The Company believes the Section 382 limitations will result in approximately 89% of the federal and state NOLs expiring before they can be utilized, and approximately 88% of the federal tax credit carryforwards expiring before they can be utilized.

As of December 31, 2021, the Company had NOLs of approximately $214.1 million for federal income tax purposes and approximately $134.1 million for state income tax purposes. Only approximately $20.2 million of the federal NOLs and $16.7 million of the state NOLs are expected to be available before expiration due to the Section 382 limitation. These NOLs are available to reduce future taxable income and will expire at various times from 2025 through 2041, except federal NOLs from 2018 to 2021 which will never expire. The Company also had federal research and development tax credit carryforwards of approximately $8.6 million, which will begin expiring in 2022, and California research and development credits of approximately $8.4 million, which do not have an expiration date.   

A reconciliation of income taxes provided at the federal statutory rate (21%) to the actual income tax provision is as follows (in thousands):

 

 

Year Ended

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Income tax benefit computed at U.S. statutory rate

 

$

(1,503

)

 

$

(794

)

Research and development credits

 

 

(131

)

 

 

(66

)

Amortization of intangible assets

 

 

(60

)

 

 

(60

)

Valuation allowance changes affecting tax provision

 

 

1,693

 

 

 

919

 

Other

 

 

1

 

 

 

1

 

Income tax provision

 

$

—

 

 

$

—

 

 

The losses before income tax provision for the years ended December 31, 2021 and 2020 were solely attributable to US operations.