Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

12. Income Taxes

The components of net loss before income tax benefit are as follows (in thousands):

	Year Ended December 31,
	2023		2022
U.S. operations	$	(65,697)	$	(72,750)
Non-U.S. operations		(22,750)		(12,160)
Net loss before income tax benefit	$	(88,447)	$	(84,910)

The components of the income tax expense (benefit) are as follows (in thousands):

	Year Ended December 31,
	2023		2022
U.S. federal
Current	$	—	$	(144)
U.S. state and local
Current		—		(53)
Income tax expense (benefit)	$	—	$	(197)

Reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate the Company’s income tax benefit is as follows:

	Year Ended December 31,
	2023		2022
Federal statutory rate	21.00	%	21.00	%
State income taxes, net of federal benefit	8.74		(0.12)
Research and development tax credit	(3.74)		(2.22)
Acquired in process research and development	—		(0.02)
Rate change	—		1.29
Other	2.90		0.21
Change in valuation allowance	(28.90)		(19.91)
Effective tax rate	—	%	0.23	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income and for tax carryforwards. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2023		2022
Deferred tax assets:
Net operating losses	$	54,109	$	44,606
Capitalized research and development costs		24,698		11,996
Stock compensation		2,787		2,193
Accrued expenses		757		523
Amortization		357		540
Lease liability		182		309
Depreciation		56		—
Other		110		107
Total deferred tax assets		83,056		60,274
Valuation allowance		(82,958)		(57,245)
Deferred tax assets, net		98		3,029
Deferred tax liabilities:
IPR&D assets		—		(2,847)
Right of use asset		(98)		(164)
Depreciation		—		(18)
Total deferred tax liabilities		(98)		(3,029)
Total deferred tax assets (liabilities), net	$	—	$	—

The Company assesses the need for a valuation allowance against our deferred tax assets and considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The increase in the valuation allowance during the year ended December 31, 2023 primarily relates to increases for current year losses in both the U.S. and foreign locations. The Company has recorded a valuation allowance against its net U.S. and net non-U.S. deferred tax assets which it believes are not more likely than not realizable. Deferred tax liabilities will be applied in the future to offset against net operating losses (“NOLs”) that have an indefinite life.

The Company has U.S. federal and state net operating loss carryforwards of approximately $152.7 million and $143.3 million, respectively, as of December 31, 2023, of which a portion of the federal and state amount of $7.1 million and $143.3 million, respectively, has a 20-year carry forward period that will expire at various dates beginning in 2024. Under current law, the remaining federal amount of $145.6 million has an indefinite life and amounts utilized in the future may not exceed 80% of taxable income. The Company also has foreign net operating loss carryforward of approximately $50.9 million which carryforward indefinitely.

Under Section 382 of the Internal Revenue Code of 1986 (“IRC 382”), as amended, substantial changes in the Company’s ownership may limit the amount of NOLs that can be utilized annually in the future to offset its U.S. federal and state taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within any three-year period. The amount of the annual limitation is determined based on the value of the Company immediately before the ownership change. The Company has reduced the NOL and related valuation allowance in historical periods for NOLs that cannot be utilized in the future because of IRC 382.

The Company has reviewed for any ownership changes as defined under IRC Section 382 from January 1, 2021 through November 3, 2023 and determined that the ownership change was less than 50% during that period. The Company’s existing NOLs are subject to limitations arising from previous ownership changes impacting the timing and amount, and the impact of such changes is reflected in the NOL amounts disclosed above. In addition, future changes in the Company’s stock ownership, many of which are outside of the Company’s control, could result in an ownership change.

Beginning January 1, 2022, pursuant to the Tax Cuts and Jobs Act of 2017 ("TCJA"), R&D costs in the current period are required to be capitalized and amortized over five or fifteen years, for domestic and foreign-incurred R&D, respectively.

Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These liabilities are established when the Company believes that its tax return positions are more-likely-than-not to be sustained upon audit by taxing authorities. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to these liabilities.

The amount of unrecognized tax benefits was $0.7 million as of both December 31, 2023 and 2022. Any changes in the next twelve months are not anticipated to have a significant impact on the results of operations, financial position or cash flows of the Company. All of the Company’s uncertain tax positions, if recognized, would affect its income tax expense, although the net impact would be zero due to the Company’s valuation allowance position.

The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the year ended December 31, 2022, the company recorded income tax benefit of $0.2 million related to interest received and receivable on income tax refunds. As of December 31, 2023, potential interest and penalties on unrecognized tax benefits were not significant.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding related interest and penalties (in thousands):

	Year Ended December 31,
	2023		2022
Beginning balance	$	711	$	237
Increases for prior year tax positions		—		474
Ending balance	$	711	$	711

The Company files income tax returns in the United States, various U.S. states, U.K. and Australia. The Company is still open to examination by the applicable taxing authorities from 2010 forward, although tax attributes that were generated prior to 2010 may still be adjusted upon examination by federal, state, foreign or local tax authorities if they either have been or will be used in a future period.