Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019


17.			Income Taxes

Loss before income tax expense consists of the following (in thousands):


	Year ended December 31,
	2019		2018
US	$	(44,793)	$	(40,252)
Foreign	—		—
Total	$	(44,793)	$	(40,252)

The components of the provision for income tax expense consist of the following (in thousands):


	Year ended December 31,
	2019		2018
Current
Federal	$	—	$	—
State	2		2

Deferred
Federal	—		—
State	—		—

Total provision for income taxes	$	2	$	2

Reconciliation of the statutory federal income tax rates consist of the following :


	Year ended December 31,
	2019		2018
Tax at federal statutory rate	21.00	%	21.00	%
State tax, net of federal benefit	0.06	%	0.22	%
Change in rate	(0.07)	%	(0.04)	%
Valuation allowance	(19.11)	%	(20.24)	%
Impairment charge of acquired IP	(0.24)	%	—	%
Excess benefits from equity compensation	—	%	—	%
Other	(1.64)	%	(0.93)	%
Provision for taxes	—	%	0.01	%

The components of deferred tax assets (liabilities) included on the consolidated balance sheet are as follows (in thousands):


	As of December 31,
	2019		2018
Deferred tax assets
Capitalized start-up costs	$	3,767	$	4,103
Credits	364		465
Net operating losses	20,049		13,134

Others	2,744		1,153
Total gross deferred tax assets	26,924		18,855
Valuation allowance	(26,713)		(18,299)
Total gross deferred tax assets (net of valuation allowance)	$	211	$	556

Deferred tax liabilities
Patents	$	(192)	$	(250)
Fixed assets	(19)		(108)
Beneficial conversion feature - debt discount	—		(198)
Total gross deferred tax liabilities	(211)		(556)
Net deferred tax assets	$	—	$	—

The Company’s effective tax rate for the year ended December 31, 2019 was lower than the statutory tax rate primarily because of the valuation allowance on its US deferred tax assets taxed at lower rates, partially offset by state taxes and tax credits. The income tax expense for the years ended December 31, 2019 and December 31, 2018 relate to state minimum income tax.

Based on the available objective evidence at this time, management believes that it is more likely than not that the net deferred tax assets of the Company will not be fully realized. Accordingly, management has applied a full valuation allowance against net deferred tax assets at both December 31, 2019 and December 31, 2018. The net valuation allowance increased by approximately $8.41 million during the year ended December 31, 2019. The increase in net valuation allowance primarily relates to net operating losses generated during 2019.

The Company has Federal and California net operating loss carry-forwards of approximately $94.1 million and $4.1 million, respectively, available to reduce future taxable income which will begin to expire in December 31, 2034 for Federal and California purposes.

At December 31, 2019, the Company had research and development credits carryforward of approximately $0.1 million and $0.5 million for Federal and California income tax purposes, respectively. If not utilized, the Federal research and development credits carryforward will begin to expire in December 31, 2034. The California credits can be carried forward indefinitely.

Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of net operating loss carryforwards prior to utilization.

The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2019, the Company had no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgement and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2019, the Company’s total amount of unrecognized tax benefit was approximately $0.2 million, none of which will affect the effective tax rate, if recognized. The Company does not expect its unrecognized benefits to change materially over the next twelve months.

The Company files income tax returns with the United States federal government and the State of California. The Company’s tax returns for all prior years from the Company's inception in 2014 remain open to audit for Federal and California purposes.