Hyliion Holdings Corp. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is currently listed on the NYSE under the symbols “HLYN”. Prior to the consummation of the business combination agreement (“Business Combination”), our common stock was listed on the NYSE under the symbols “SHLL”. As of February 23, 2021, there were 170,255,200 holders of record of our Common Stock. Dividend Policy We have not paid any cash dividends on our common stock to date. We may retain future earnings, if any, for future operations, expansion and debt repayment and has no current plans to pay cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors (the “Board”) and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that the Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. We do not anticipate declaring any cash dividends to holders of the common stock in the foreseeable future. Recent Sales of Unregistered Equity Securities We had no sales of unregistered equity securities during the period covered by this Annual Report on Form 10-K that were not previously reported in a Current Report on Form 8-K or Quarterly Report on Form 10-Q. ITEM 6. SELECTED FINANCIAL DATA This item has been omitted based on the Company’s status as a smaller reporting company. 40 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. Dollar amounts in this discussion are expressed in millions, except as otherwise noted. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed elsewhere in this Form 10-K, particularly in Part I, Item 1A, Risk Factors. We do not undertake, and expressly disclaim, any obligation to publicly update any forward-looking statements, whether as a result of new information, new developments or otherwise, except to the extent that such disclosure is required by applicable law. Company Overview Hyliion is a Delaware corporation headquartered in Cedar Park, Texas. On October 1, 2020 (the “Closing Date”), Tortoise Acquisition Corp. (“TortoiseCorp”) entered into a Business Combination with each of the shareholders of Hyliion Inc. (“Legacy Hyliion”), and consummated the merger contemplated by the Business Combination, with Legacy Hyliion surviving the merger as a wholly-owned subsidiary of TortoiseCorp. As a result of the Business Combination, we became a NYSE listed company. Our mission is to be the leading provider of electrified powertrain solutions for the commercial vehicle industry. Our goal is to reduce the carbon intensity and the GHG emissions of the transportation sector by providing electrified powertrain solutions for Class 8 commercial vehicles at the lowest TCO. Our solutions utilize our proprietary battery systems, control software and data analytics, combined with fully integrated electric motors and power electronics, to produce electrified powertrain systems that either augment, in the case of our Hybrid system, or fully replace, in the case of the Hypertruck ERX system, traditional diesel or natural gas fueled powertrains and improve their performance. By reducing both GHG emissions and TCO, our environmentally conscious solutions support our customers’ pursuit of their sustainability and financial objectives. We are currently developing two electrified powertrain systems for long-haul Class 8 commercial vehicles: our Hybrid system and our Hypertruck ERX system. Our Hybrid system has been installed in low volumes on our initial customers’ commercial vehicles. Across the customer installations and over the entire Hyliion fleet we have accumulated millions of real world road miles on Class 8 commercial vehicles. Our Hybrid system can either be installed on a new vehicle during assembly and prior to entering fleet service or retrofit to an existing in-service vehicle. Our Hypertruck ERX system is in the development stage with vehicles being built for testing and validation. Our Hypertruck ERX system’s design and technology leverages the experience and operating data from our Hybrid system to replace the traditional diesel powertrain installed in new vehicles. Our Hypertruck ERX system will offer commercial vehicle owners and operators a net carbon negative electrified powertrain option for Class 8 commercial vehicles, when using certain Renewable Natural Gas (“RNG”). Our initial expected deliveries of our Hypertruck ERX systems to customers are designed to have their batteries recharged with Compressed Natural Gas (“CNG”). CNG fueled recharging is preferable due to both the current comparable cost of fuels and existing availability of CNG refueling infrastructure. Class 8 commercial vehicles can currently be refueled with CNG through existing, geographically diverse and third-party accessible natural gas refueling stations established across North America. Globally, RNG, CNG and liquefied natural gas (“LNG”) are used widely for land-based transport and trucking and Hyliion believes there are established, geographically diverse and third-party accessible refueling stations available in certain areas in which Hyliion expects it may sell its electrified powertrain solutions in the future. We believe there is opportunity for adoption of our electrified powertrain solutions across Europe. This existing and accessible refueling infrastructure will significantly reduce the buildout time and cost required to utilize our Hypertruck ERX system as compared to other proposed potential electrified solutions. See “Risk Factors — Our future growth is dependent upon the commercial trucking industry’s willingness to adopt alternative fuel, hybrid and electric vehicles.” Our Hybrid and Hypertruck ERX systems are designed to be installed on most major Class 8 commercial vehicles, which gives our customers the flexibility to continue using their preferred vehicle brands and maintain their existing fleet maintenance and operations strategies. Our early Hybrid system deployments include leaders in the transportation and logistics sector. We are focusing its initial marketing efforts on large fleet operators as well as companies committed to reducing the overall environmental impact and fuel costs of their owned and operated trucking fleets. 41 Recent Developments None. Comparability of Financial Information Our historical operations and statements of assets and liabilities may not be comparable to our operations and statements of assets and liabilities as a result of the Business Combination and becoming a public company. Business Combination and Public Company Costs On October 1, 2020, we consummated the merger contemplated by the Business Combination, with Legacy Hyliion surviving the merger as a wholly-owned subsidiary of TortoiseCorp. Immediately prior to the closing of the Business Combination, all shares of issued and outstanding redeemable convertible preferred stock converted into shares of Legacy Hyliion common stock and all outstanding convertible note payables plus accrued interest converted into shares of Legacy Hyliion common stock at the discount rates set forth in the original agreements. Upon the consummation of the Business Combination, each share of Legacy Hyliion common stock issued and outstanding was cancelled and converted into the right to receive the Per Share Merger Consideration. Additionally, Legacy Hyliion issued 1,000,000 shares of Legacy Hyliion common stock with a grant date fair value of $10.00 per share to one of the convertible noteholders in connection with the Commercial Matters Agreement. Upon the closing of the Business Combination, TortoiseCorp’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 260,000,000 shares, of which 250,000,000 shares were designated common stock, $.0001 par value per share, and of which 10,000,0000 shares were designated preferred stock, $0.0001 par value per share. In connection with the Business Combination, a number of investors purchased from the Company an aggregate of 30,750,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $307.5 million pursuant to separate subscription agreements entered into effective June 18, 2020 (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Business Combination. Additionally, a purchaser purchased 1,750,000 TortoiseCorp units (consisting of one share of common stock and one half of one warrant, the “Forward Purchase Units”), consisting of 1,750,000 shares of common stock (“Forward Purchase Shares”) and warrants to purchase 875,000 shares of common stock (“Forward Purchase Warrants”) for an aggregate purchase price of $17.5 million pursuant to a forward purchase agreement entered into effective February 6, 2019, as amended by the First Amendment to Amended and Restated Forward Purchase Agreement, dated June 18, 2020. Legacy Hyliion was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805. The determination was primarily based on Legacy Hyliion’s stockholders prior to the Business Combination having a majority of the voting interests in the combined company, Legacy Hyliion’s board of directors comprising a majority of the board of directors of the combined company, Legacy Hyliion’s existing shareholders’ control over decisions regarding the election and removal of directors and officers of the combined company’s board of directors, and Legacy Hyliion’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Hyliion issuing stock for the net assets of TortoiseCorp, accompanied by a recapitalization. The net assets of TortoiseCorp are stated at historical cost, with no goodwill or intangible assets recorded. As a result of the Business Combination, we became a NYSE listed company, which will require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit, compliance, and legal fees. Key Factors Affecting Operating Results We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including but not limited to those discussed below and in Item 1A “Risk Factors”. 42 Successful commercialization of our drivetrain solutions We expect to derive future revenue from our Hybrid systems and Hypertruck ERX system. Our Demonstrator Hybrid system is available today, offering customers the immediate ability to lower costs and improve environmental impact, and we intend to introduce our improved next generation Hybrid system for customer deliveries in late 2021. Our Hypertruck ERX system is projected to be delivered to customers for evaluation and testing in late 2021 with commercial availability projected for 2022. In order to reach commercialization, we must purchase and integrate related property and equipment, as well as achieve several research and development milestones. We anticipate that a substantial portion of our capital resources and efforts in the near future will be focused on the continued development and commercialization of our drivetrain solutions. The amount and timing of our future funding requirements, if any, will depend on many factors, including the pace and results of our research and development efforts, as well as factors that are outside of our control. Customer Demand As discussed above in more detail, we have deployed demonstration Hybrid system units to a number of companies, and our Hypertruck ERX system is generating interest from companies who have received demonstration Hybrid system units and potential new customers. Key Components of Statements of Operations Research and Development Expense Research and development expenses consist primarily of costs incurred for the discovery and development of our electrified powertrain solutions, which include: ● personnel-related expenses including salaries, benefits, travel and share-based compensation, for personnel performing research and development activities; ● fees paid to third parties such as consultants and contractors for outsourced engineering services; ● expenses related to materials, supplies and third-party services; ● depreciation for equipment used in research and development activities; and ● allocation of general overhead costs. We expect research and development costs to increase for the foreseeable future as we continue to invest in research and development activities to achieve operational and commercial goals. Selling, General and Administrative Expense Selling, general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing costs. Personnel-related expenses consist of salaries, benefits and share-based compensation. We expect our selling, general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of its business, and as a result of operating as a public company, including compliance with the rules and regulations of the U.S. Securities and Exchange Commission, legal, audit, additional insurance expenses, investor relations activities and other administrative and professional services. Other Income (Expense), Net Other income and expenses consist primarily of interest expense incurred on our debt obligations, interest income earned on our investments, remeasurement gain or loss associated with the change in the fair value on our convertible notes payable derivative liabilities and a loss on the extinguishment of our convertible notes payable. 43 Results of Operations Comparison of Years Ended December 31, 2020 and 2019 The following table summarizes our results of operations on a consolidated basis for the years ended December 31, 2020 and 2019: Years Ended December 31, $ % 2020 2019 Change Change (in thousands, except earing per share) Operating expenses: Research and development $ (12,598 ) $ (9,269 ) $ (3,329 ) 35.9 % Selling, general, and administrative (9,585 ) (2,730 ) (6,855 ) 251.1 % Loss from operations (22,183 ) (11,999 ) (10,184 ) 84.9 % Other income (expense): Interest expense (5,465 ) (3,260 ) (2,205 ) 67.6 % Interest income 6 - 6 100.0 % Change in fair value of convertible notes payable derivative liabilities (1,358 ) 1,119 (2,477 ) (221.4 )% Other income (12 ) 27 (39 ) (144.4 )% Loss on extinguishment of debt (10,170 ) - (10,170 ) (100.0 )% Total other expense (16,999 ) (2,114 ) (14,885 ) 704.1 % Net loss attributable to common stockholders, basic and diluted $ (39,182 ) $ (14,113 ) $ (25,069 ) 177.6 % Net loss per share, basic and diluted $ (0.38 ) $ (0.16 ) $ (0.22 ) 137.5 % Weighted-average shares outstanding, basic and diluted 104,324,059 86,643,714 17,680,484 20.4 % Research and Development Research and development expenses increased by $3.3 million from $9.3 million for the year ended December 31, 2019 to $12.6 million for the year ended December 31, 2020 as a result of increased expenditures for external consultancy by $2.2 million, and increased expenditures for components utilized in the development process were increased by $1.1 million in our efforts to finalize the design of our Hybrid system and continue the design and testing of our Hypertruck ERX system during the year ended December 31, 2020. Selling, General and Administrative Selling, general, and administrative expenses increased by $6.8 million from $2.7 million for the year ended December 31, 2019 to $9.6 million for the year ended December 31, 2020, primarily due to additional costs incurred to operate as a public company which, include increased expenditures for personnel and benefits by $2.4 million, increased expenditures for directors and officers insurance by $1.2 million, increased expenditures for legal and professional fees by $2.8 million, increase in facilities leases by $0.2 million, and increased expenditures for other expenses by $0.2 million. Other Income (Expense) Total other expense increased by $14.9 million from $2.1 million of other expense for the year ended December 31, 2019 to $17.0 million of other expense for the year ended December 31, 2020. The increase was primarily due to the following: ● Loss on extinguishment of debt of $10.2 million for the year ended December 31, 2020 that is attributable to the extinguishment of convertible notes in connection with the Business Combination. ● Interest expense increased by $2.2 million from $3.3 million for the year ended December 31, 2019 to $5.5 million for the year ended December 31, 2020, primarily due to our convertible notes payable. There was a $3.2 million issuance of a convertible note payable debt obligation in January 2020 and $16.8 million issuances of convertible note payable debt obligations at various points of 2019 were outstanding for a full year in 2020, resulting in an increase in paid-in-kind interest incurred in 2020. Additionally, all convertible notes payable issuances contained certain embedded features, which were required to be bifurcated and separately accounted for as derivative liabilities that were recognized at issuance as a liability and a corresponding debt discount, which was then amortized to interest expense over the term of the associated convertible notes payable. For the years ended December 31, 2020 and 2019, interest expenses consisted primarily of (a) interest payable in kind at an annual stated rate of 6.0% for a total of $1.1 million and $0.7 million, respectively, (b) convertible note payable discount amortization of $3.8 million and $2.5 million, respectively and (c) financing costs of $0.5 million and less than $0.1 million, respectively. 44 ● A loss from the change in fair value of convertible notes payable derivative liabilities of $1.4 million for the year ended December 31, 2020 and a gain from the change in fair value of convertible notes payable derivative liabilities of $1.1 million for the year ended December 31, 2019. Liquidity and Capital Resources Prior to the Business Combination, the Company’s operations were financed through private placements of redeemable convertible preferred stock and the issuance of convertible notes payable. As of December 31, 2020, our principal sources of liquidity were our cash and cash equivalents in the amount of $389.7 million, which are primarily invested in money market funds. On November 30, 2020, we issued a notice of redemption to the warrant holders for a redemption of all of the outstanding warrants, on a cash or in the case of the Private Placement Warrants on a cashless basis. As a result, we raised gross proceeds of $140.8 million, $16.3 million of which was received during the first quarter of 2021. As of the date of this Annual Report on Form 10-K, we have yet to generate revenue from our core business operations. As of December 31, 2020, our current assets were $608.1 million, consisting primarily of cash and cash equivalents of $389.7 million, short-term investments of $201.9 million, and prepaid expenses of $16.4 million. Our current liabilities were $4.7 million primarily comprised of accounts payable, accrued expenses, operating lease liabilities, and our Payroll Protection Program (“PPP”) loan. We believe the credit quality and liquidity of our investment portfolio as of December 31, 2020 is strong and will provide sufficient liquidity to satisfy operating requirements, working capital purposes and strategic initiatives. The unrealized gains and losses of the portfolio may remain volatile as changes in the general interest environment and supply/demand fluctuations of the securities within our portfolio impact daily market valuations. To mitigate the risk associated with this market volatility, we deploy a relatively conservative investment strategy focused on capital preservation and liquidity whereby no investment security may have a final maturity of more than 36 months from the date of acquisition or a weighted average maturity exceeding 18 months.. Eligible investments under the Company’s investment policy bearing a minimum credit rating of A1, A-1, F1 or higher for short-term investments and A2, A, or higher for longer-term investments include money market funds, commercial paper, certificates of deposit, and municipal securities. Additionally, all of our debt securities are classified as held-to-maturity as we have the intent and ability to hold these investment securities to maturity, which minimizes the realized losses that we would recognize. However, even with this approach we may incur investment losses as a result of unusual or unpredictable market developments, and we may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further due to unpredictable market developments. In addition, these unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio. Based on our past performance, we believe our current assets will be sufficient to continue and execute on our business strategy and meet our capital requirements for the next twelve months. Our primary short-term cash needs are paying operating expenses and servicing outstanding indebtedness. We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives by (i) completing the development and commercialization of the hybrid and electrified drive systems for long haul “Class 8” semi-tractors, (ii) scale the Company’s operations to meet anticipated demand, and (iii) hiring of personnel. However, actual results could vary materially and negatively as a result of a number of factors including, but not limited to, those discussed in the section “Risk Factors.” Cash Flows The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K: Year Ended December 31, 2020 2019 (in thousands) Net cash provided by (used in) Operating activities $ (22,944 ) $ (11,072 ) Investing activities (238,140 ) (349 ) Financing activities 644,504 16,609 Net change in cash and cash equivalents $ 383,420 $ 5,188 Net cash used in operating activities For the year ended December 31, 2020, cash flows used in operating activities was $23.0 million. The cash used primarily related to a net loss of $39.2 million, adjusted for changes in working capital accounts and certain non-cash expense of $18.9 million (including $10.2 million related to the loss on extinguishment of convertible notes payable, $4.2 million related to amortization of debt discount, $1.4 million related to a loss from the change in fair value of the convertible notes payable derivative liabilities, $1.1 million related to paid-in-kind interest on convertible notes payable, $0.9 million related to non-cash lease expense, $0.9 million related to depreciation and amortization, and $0.3 million related to share-based compensation). 45 For the year ended December 31, 2019, cash flows used in operating activities were $11.1 million. The cash used primarily related to a net loss of $14.1 million, adjusted for changes in working capital accounts and certain non-cash expense of $4.5 million (including $1.3 million related to non-cash lease expense, $1.0 million related to depreciation and amortization, $1.1 million related to a gain from the change in fair value of the convertible notes payable derivative liabilities, $2.5 million related to amortization of the debt discount, $0.7 million related to paid-in-kind interest on convertible notes payable and $0.1 million related to share-based compensation). Net cash used in investing activities Net cash used in investing activities primarily relates to the purchase of investments during the year ended December 31, 2020 and totaled $238.1 million. Net cash used in investing activities primarily relates to the purchase of capital expenditures primarily attributable to equipment and machinery, demonstration and test vehicles, leasehold improvements, office furniture and equipment for the year ended December 31, 2019 and totaled $0.3 million. Net cash used in investing activities is expected to increase substantially as we purchase additional property and equipment as we continue the development of our Hybrid and Hypertruck ERX systems and scale the manufacturing operations to meet anticipated demand. Net cash provided by financing activities Cash provided by financing activities was $644.5 million for the year ended December 31, 2020, which was primarily due to net proceeds of $516.5 million from the Business Combination and PIPE, proceeds from the exercise of warrants of $124.5 million, the issuance of $3.2 million of convertible notes payable in exchange for cash, proceeds of $0.9 million from the PPP loan, partially offset by the payments for financing costs of $0.5 million and finance lease obligations of $0.2 million. Cash provided by financing activities was $16.6 million for the year ended December 31, 2019, which was primarily due to the issuance of $16.8 million of convertible notes payable in exchange for cash, partially offset by the repayment on finance lease obligations of $0.2 million. Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date, as well as the reported expenses incurred during the reporting period. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our financial statements. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. While our significant accounting policies are described in the notes to our financial statements (see Note 2 in the accompanying audited consolidated financial statements), we believe that the following accounting policies require a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Share-Based Compensation We account for share-based payments that involve the issuance of shares of our common stock to employees and nonemployees and meet the criteria for share-based awards as share-based compensation expense based on the grant-date fair value of the award. For periods prior to the Business Combination, we issued stock option awards to employees and nonemployees under the Hyliion Inc. 2016 Equity Incentive Plan (the “2016 Plan”), as amended in August 2017 and approved by the board of directors (the “Board”). Outstanding stock options, whether vested or unvested, under the 2016 Plan to purchase shares of Legacy Hyliion common stock granted under the 2016 Plan converted into stock options for shares of the combined company’s common stock upon the same terms and conditions that were in effect with respect to such stock options immediately prior to the Business Combination, after giving effect to the Exchange Ratio. No further grants can be made under the 2016 Plan. For periods subsequent to the Business Combination, share-based awards will be issued under the 2020 Equity Incentive Plan (the “2020 Plan”). As of December 31, 2020, no awards were issued under the 2020 Plan. 46 The fair value of the stock options issued to employees and nonemployees under the 2016 Plan was estimated at each grant date using the Black-Scholes model which requires the input of the following subjective assumptions: a) The length of time grantees will retain their vested stock options before exercising them for employees and the contractual term of the option for nonemployees (“expected term”), b) The volatility of our common stock price over the expected term, c) The expected dividends, and d) The risk-free interest rate over the option’s expected term. A summary of the significant assumptions used to estimate the fair value of stock option awards during the years ended December 31, 2020 and 2019 were as follows: Years Ended December 31, 2020 2019 Expected volatility 70.0% 70.0% Expected term (in years) 6.1 6.1 - 10 Risk-free interest rate 1.7% 1.4 - 3.0% Expected dividend yield 0.0% 0.0% ● Expected volatility: The expected volatility was determined by examining the historical volatilities of a group of industry peers, as the Company did not have any trading history for our Legacy Hyliion common stock. ● Expected term: For employees, the expected term is determined using the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of the Company’s employee stock options, which are considered to have “plain vanilla” characteristics. For nonemployees, the expected term represents the contractual term of the option. ● Risk-free interest rate: The risk-free interest rate was based upon quoted market yields for the United States Treasury instruments with terms that were consistent with the expected term of the stock options. ● Expected dividend yield: The expected dividend yield was based on Legacy Hyliion’s history and management’s current expectation regarding future dividends. If factors change, and we utilize different assumptions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants. Higher volatility and longer expected terms result in an increase to share-based compensation determined at the date of grant. Future share-based compensation cost will increase to the extent that we grant additional share-based awards to employees and non-employees. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost. Share-based compensation cost affects our research and development expenses and selling, general and administrative expenses. Based on our fair value of common stock of $16.48 at December 31, 2020 and our estimated fair value of common stock of $0.34 at December 31, 2019, the aggregative intrinsic value of the vested and unvested options to purchase shares of our common stock outstanding at December 31, 2020 and 2019 was $113.8 million and $0.3 million, respectively. We recognized share-based compensation of $0.3 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively. We recognize and adjustment to share-based compensation expense in the period in which forfeitures occur. The effect of forfeiture adjustments during 2020 and 2019 was insignificant. In future periods, we expect share-based compensation to increase, due in part to our existing unrecognized share-based compensation and as we issue additional share-based awards to continue to attract and retain employees. As of December 31, 2020, there was $0.4 million of unrecognized compensation cost related to share-based payments, which is expected to be recognized over an average period of 2.6 years. 47 Income Taxes We recognize deferred taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. At December 31, 2020, we had federal net operating loss carryforwards of approximately $82.2 million and state net operating loss carryforwards of $12.5 million that expire in various years starting in 2036. The Company also has R&D credits of $0.3 million that begin to expire in 2037. Under Section 382 of the Code, substantial changes in our ownership may result in an annual limit on the amount of net operating loss carryforwards that could be utilized in the future to offset our taxable income. Generally, this limitation may arise in the event of a cumulative change in ownership of more than 50% within a three-year period. We have completed such analysis and determined that such ownership change occurred in 2017. This will limit the usage of our 2017 and prior year net operating losses, and will cause $2.0 million of such losses to expire unused, regardless of future taxable income. No other such ownership changes have occurred through December 31, 2020. Due to this, as well as our overall profitability estimate as noted above, we have recorded a full valuation allowance related to our net operating loss carryforwards and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. There was no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in our statements of operations for the years ended December 31, 2020, and 2019. Emerging Growth Company Status Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time we are no longer considered to be an emerging growth company. At times, we may elect to early adopt a new or revised standard. See Note 2 of the accompanying audited financial statements for the recent accounting pronouncements adopted and the recent accounting pronouncements not yet adopted for the years ending December 31, 2020, and 2019. 48 In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an emerging growth company, we intend to rely on such exemptions, we are not required to, among other things: (a) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (b) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (c) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (d) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. We will remain an emerging growth company under the JOBS Act until the earliest of (a) the last day of our first fiscal year following the fifth anniversary of the Closing, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years. New and Recently Adopted Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations under adoption. See Recent Accounting Pronouncements issued, not yet adopted under Note 2 – Summary of Significant Accounting Policies in the notes to the 2020 consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.