Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Taxes  
Income Taxes

9. Income Taxes

The Company has pre-tax US book income of $11.8 million for the year ended December 31, 2020. The Company has recorded $1.5 million of income tax benefit for the year ended December 31, 2020 and no income tax provision for the year ended December 31, 2019.

The provision (benefit) for income taxes (all current) consists of the following (in thousands):

Year Ended December 31, 

    

2020

    

2019

Federal

$

(1,501)

$

State

 

 

Total

$

(1,501)

$

Reconciliation between the tax provision computed at the federal statutory income tax rate and the Company’s actual effective income tax rate is as follows:

Year Ended December 31, 

 

    

2020

    

2019

 

Federal tax at statutory rate

 

21

%  

21

%

Stock compensation and other permanent differences

 

(6)

%  

(31)

%

Tax benefit related to CARES Act

 

(13)

%  

%

Valuation allowance

 

(15)

%  

10

%

Total

 

(13)

%  

%

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted, which includes a five-year net operating loss (“NOL”) carryback provision which enabled the Company to benefit from certain losses at the former federal tax rate of 34%. In 2020, the Company recorded tax benefits of $1.5 million related to the NOL carryback provision.

The Consolidated Appropriations Act was also signed into law on December 27, 2020 to provide further relief measures and renew various expiring tax provisions. The Company does not expect there is material impact to its income tax expenses.

The significant components of net deferred tax assets at December 31, 2020 and 2019 were as follows (in thousands):

December 31, 

    

2020

    

2019

Capitalized research and development expenses

$

11,500

$

15,735

Net operating loss carryforwards

 

17,638

 

18,181

Research and development and other tax credit carryforwards

 

13,454

 

12,343

Stock compensation

 

5,158

 

4,737

Unearned revenue

 

3,462

 

3,635

Other

 

401

 

930

Total deferred tax assets

 

51,613

 

55,561

Valuation allowance

 

(51,613)

 

(55,561)

Net deferred tax assets

$

$

The net decrease in the valuation allowance was $3.9 million and $2.0 million, for the years ended December 31, 2020 and 2019, respectively.

Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s four sources of taxable income including historical operating performance and the repeal of net operating loss carryback, the Company has determined that total deferred tax assets should be fully offset by a valuation allowance.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-change NOLs and certain other pre-change tax attributes that can be utilized to annual limitations), the Company experienced an ownership change in February 2017 which substantially limits the future use of its pre-change NOLs and certain other pre-change tax attributes per year. The Company has excluded the related tax attributes that will expire as a result of the annual limitations in the deferred tax assets as of December 31, 2020 and December 31, 2019. To the extent that the Company does not utilize its carry-forwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.

As of December 31, 2020, the Company had federal net operating loss carry-forwards of approximately $78.6 million and state net operating loss carry-forwards of approximately $38.3 million to offset future taxable income. $13.6 million of federal net operating loss carryforwards will begin to expire in 2036 and the remainder may be carried forward

indefinitely. The state net operating loss carryforwards will begin to expire in 2033. The Company had federal orphan credit of $2.3 million which if not utilized will expire in 2037. The Company also had $19.8 million of California research and development tax credits which have no expiration date.

Under the 2017 federal income tax law, as modified by the federal tax law changes enacted in March 2020, federal net operating losses incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but, for taxable years beginning after December 31, 2020, the deductibility of such federal net operating losses may only be utilized to offset 80% of taxable income annually.  

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company’s federal income tax returns for tax years 2017 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns for tax years 2016 and beyond remain subject to examination by state tax authorities. In addition, all of the net operating losses and research and development credit carry-forwards that may be used in future years are still subject to adjustment.

The following table summarizes the Company’s activity related to its unrecognized tax benefits (in thousands):

Year Ended December 31, 

    

2020

    

2019

Balance at January 1

$

5,517

$

5,517

Increase related to current year tax position

 

 

Increase (decrease) related to prior year tax position

 

421

 

Balance at December 31

$

5,938

$

5,517

As of December 31, 2020, the Company had a total of $5.9 million of gross unrecognized tax benefits, none of which would affect the effective tax rate upon realization. The Company currently has a full valuation allowance against its U.S. net deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.

The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Through December 31, 2020, the Company has not accrued interest or penalties related to uncertain tax positions.