CV Sciences, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2020

The Company is subject to taxation in the U.S. and California state jurisdictions. The Company’s pretax loss for the years ended December 31, 2020 and 2019, were generated by domestic operations. The income tax benefit for the years ended December 31, 2020 and 2019 was comprised of the following (in thousands):


	For the years ended December 31,
	2020		2019
Current:
Federal	$	—	$	—
State	(52)		29
Total current tax expense (benefit)	(52)		29
Deferred:
Federal	(1)		(640)
State	(264)		(4)
Total deferred tax benefit	(265)		(644)
Income tax benefit	$	(317)	$	(615)

A reconciliation of the expected income tax benefit at the federal statutory rate of 21% for the years ended December 31, 2020 and 2019, and the income tax benefit reported in the financial statements is as follows:


	For the years ended December 31,
	2020				2019
	Amount		% of pretax income (loss)		Amount		% of pretax income (loss)
Income tax benefit at federal statutory rate	$	(4,746)	21.0	%	$	(3,624)	21.0	%
State taxes, net of federal effect	(1,391)		6.2		(1,142)		6.6
Other permanent differences	115		(0.5)		43		(0.2)
Stock-based compensation	569		(2.5)		(274)		1.6
Non-deductible officer compensation (IRC 162(m))	—		—		1,242		(7.2)
R&D tax credits	(242)		1.1		(320)		1.9
Other	769		(3.6)		(241)		1.4
Increase in valuation allowance	4,609		(20.4)		3,701		(21.5)
Income tax benefit	$	(317)	1.3	%	$	(615)	3.6	%

The following table summarizes the significant components of the Company's deferred tax assets and liabilities as of December 31, 2020 and 2019 (in thousands):


	December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	5,876	$	2,627
Business credit carryforwards	918		620
Intangible assets	756		890
Stock-based compensation	6,470		6,740
Change to inventory	61		268
Operating lease liabilities	1,126		2,866
Accruals and reserves	2,275		383
	17,482		14,394
Deferred tax liabilities:
Operating lease assets	(830)		(2,437)
Property and equipment	(396)		(390)
CanX intangible assets	(1,013)		(1,054)
Other	(29)		(172)
	(2,268)		(4,053)
Valuation allowance	(15,371)		(10,762)
Net deferred tax liabilities	$	(157)	$	(421)

The valuation allowance increased by $4.6 million for the year ended December 31, 2020 and increased by $3.7 million for the year ended December 31, 2019.

Deferred tax assets and liabilities are provided for significant revenue and expense items recognized in different years for tax and financial reporting purposes. The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible profits. As of December 31, 2020 and 2019, the Company established valuation allowances equal to the full amount of its deferred tax assets, net of certain tax liabilities, due to the uncertainties regarding the realization of the deferred tax assets in future years.

As of December 31, 2020, the Company has federal, California, and other state net operating loss (“NOL”) carryforwards of $21.4 million, 16.9 million, and $3.4 million, respectively, which are available to offset future taxable income. Federal NOL carryforwards arising after 2017 of $14.2 million do not expire. Federal NOL carryforwards arising before 2018 of $7.2 million expire from 2036 to 2037. California NOL carryforwards of 16.9 million expire from 2036 to 2040. Other state NOL carryforwards of $3.4 million have various expirations from 2038 to 2040.

As of December 31, 2020, the Company has federal and California R&D credit carryforwards of approximately $0.7 million and $0.4 million, respectively, which are available to offset future taxable income. Federal R&D credit carryforwards expire from 2034 to 2040. California R&D credit carryforwards do not expire.

The NOL carryforward may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986 (the “Code”), and similar state provisions if the Company experienced one or more ownership changes which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change as defined by Section 382 and 383, results from the transactions increasing ownership of certain stockholders or public groups in the stock of the corporation of more than 50% over a three-year period. The Company completed a Section 382 and 383 analysis regarding the limitation of NOL and credit carryforwards from inception in December 2010 through November 4, 2019. The Company experienced multiple ownership changes for the purposes of Section 382 and 383 of the Code with the latest change in April 2017. The ownership changes did not result in the forfeiture of any NOLs or credits generated prior to this date. If a change in ownership occurs in the future, the NOL and tax credits carryforwards could be eliminated or restricted.

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits, and uncertain income tax positions must meet a more likely than not recognition threshold to be recognized. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations.

The Company does not anticipate a significant change in its uncertain tax benefits over the next 12 months. The Company is subject to taxation in the U.S. and California state jurisdictions. Due to net operating losses all tax years since inception remain open to examination.

A reconciliation of the Company's unrecognized tax benefits for the years ended December 31, 2020 and 2019 is provided in the following table (in thousands):


	2020		2019
Balance as of January 1:	$	—	$	—
Increase in current year positions	47		—
Increase in prior year positions	119		—
Decrease in prior year positions	—		—
Balance as of December 31:	$	166	$	—

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details