Income taxes

12 Months Ended

Dec. 31, 2023

Income taxes

Income taxes

14. Income taxes

A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows:

	Year ended
	December 31,
	2023		2022
Federal tax benefit at statutory rate	21.0	%	21.0	%
State tax, net of federal benefit	(1.3)		4.3
Effects of state tax legislation, net of federal benefit	—		(7.1)
Research and development credits	0.7		1.9
Permanent differences	(0.9)		(0.2)
Write-off of IPR&D	(15.9)		—
Change in valuation allowance	(3.6)		(19.9)
	—	%	—	%

The components of the Company’s deferred taxes are as follows (in thousands):

	December 31,
(in thousands)	2023		2022
Deferred tax assets:
Net operating loss carryforwards	$	22,784	$	20,523
Research and development intangibles		10,135		4,839
Research and development credits		3,782		2,878
Share-based compensation		2,533		2,016
Accrued bonus		546		383
Lease liability		350		—
Other		75		1
Gross deferred tax assets		40,205		30,640
Less: valuation allowance		(39,827)		(30,609)
Net deferred tax asset		378		31
Deferred tax liability
Depreciation		(46)		(31)
Right-of-use asset		(332)		—
Total deferred tax liabilities		(378)		(31)
Net deferred taxes	$	—	$	—

The Company had no income tax expense due to the operating losses utilization for the year ended December 31, 2023 and 2022. Management has evaluated the positive and negative evidence bearing upon the realizability of the Company’s net deferred tax assets and has determined that it is more likely than not that the Company will not recognize the benefits of the net deferred tax assets. As a result, the Company has recorded a full valuation allowance at December 31, 2023 and 2022. The valuation allowance increased by $9.2 million and $7.4 million in 2023 and 2022, respectively, due to the acquisition of Morphimmune, increase in net operating loss carryforwards and research and development tax credits, and deductible accrued expenses.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss and other attributes including research and development credit carry forwards which could be used annually to offset future taxable income. Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership

changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. Based upon a preliminary evaluation of ownership changes through December 31, 2023, the Company believes that an ownership change likely occurred as a result of the Morphimmune transaction on October 2, 2023 that could limit the Company’s ability to utilize its net operating loss or research and development credit carryforwards. The evaluation has not been finalized as of the date of these consolidated financial statements.

As of December 31, 2023, the Company had $92.6 million of federal and $84.3 million of state net operating loss carryforwards. If not utilized, the federal and state net operating loss carryforwards expire starting in 2027. Included in the federal net operating loss carryforwards are $75.6 million of net operating losses generated from 2018 to 2023 that will not expire and are limited to offset 80% of the Company’s taxable income for years beginning after December 31, 2020. Certain federal and state net operating loss carryforwards expire at various dates through 2042. As of December 31, 2023, the Company had cumulative $3.5 million of federal and $0.2 million of state R&D tax credits. These tax credit carryforwards will expire at various dates through 2042.

As of December 31, 2023 and 2022, the Company has $37,000 of uncertain tax positions on the research and development credits from Morphimmune. The Company recognizes both interest and penalties associated with unrecognized tax benefits as a component of income tax expense. The Company has not recorded any interest or penalties for unrecognized tax benefits since its inception.

The Company filed income tax returns in the United States and Pennsylvania in all tax years since inception. The tax years 2006 and beyond remain open to examination by these jurisdictions. Carryforward attributes generated in all years since inception remain subject to adjustment. The Company is not currently under examination by the Internal Revenue Service or any other jurisdiction for these years.