Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

10. INCOME TAXES

There was no provision for income taxes for the years ended December 31, 2022 and 2021, because the Company has incurred losses since inception. At December 31, 2022 and 2021 the Company concluded it was not more likely than not that it would realize its deferred tax assets, and therefore has recorded a full valuation allowance.

For the years ended December 31, 2022 and 2021, income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 21% to pre-tax loss as follows:

	2022			2021
U.S. federal provision (benefit)
At statutory rate	$	(7,497	)	$	(5,906	)
State taxes		(2,733	)		(3,887	)
Valuation allowance		8,581			9,154
Tax credits		(1,173	)		(767	)
Stock-based compensation		2,606			1,366
Permanent differences		216			40
Total	$	—		$	—

Significant components of the Company’s deferred tax assets at December 31, 2022 and 2022 are shown below.

	2022			2021
Deferred tax assets:
Net operating losses	$	131,346		$	125,111
Research and development tax credits		18,122			16,670
Amortization		916			1,094
Lease liability		3,504			1,027
Stock based compensation		576			3,784
Other		378			254
Capitalized R&D		4,138			—
Fixed assets		10			—
Total gross deferred tax assets		158,990			147,940
Less: valuation allowance		(155,514	)		(146,933	)
Total deferred tax assets		3,476			1,007
Deferred tax liability:
Right-of-use assets		(3,476	)		(903	)
Fixed assets		—			(104	)
Total gross deferred tax liabilities		(3,476	)		(1,007	)
Net deferred tax assets	$	—		$	—

The deferred tax assets and valuation allowance increased by $8.6 million from December 31, 2021 to December 31, 2022 due primarily to the generation of net operating losses and research and development credits.

As of December 31, 2022, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $466.0 million and $434.4 million, respectively. As of December 31, 2021, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $452.4 million and $394.1 million, respectively.

The federal and state net operating loss carryforwards begin to expire in 2031 and 2022, respectively, if not utilized. Federal net operating losses of $244.8 million are not subject to expiration.

As of December 31, 2022, the Company has federal and state research and development carryforwards of approximately $11.7 million and $3.6 million, respectively. The Company also has $7.4 million of Orphan Drug Credit. As of December 31, 2021, the Company has federal and state research and development carryforwards of approximately $10.2 million and $3.2 million, respectively. The federal and state credits begin to expire in 2031 and 2029, respectively, if not utilized; $2.5 million of the state credits can be carried forward indefinitely.

Utilization of some of the federal and state net operating loss and credit carryforwards may be subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company has not performed a Section 382 study as of December 31, 2022. At least $455.8 thousand of legacy Millendo federal net operating losses are expected to expire unused due to prior ownership changes.

The Company has the following activity relating to unrecognized tax benefits as of December 31, 2022 and 2021:

	2022		2021
Beginning balance	$	4,293	$	1,280
Gross increase - tax positions in prior periods		—	$	2,767
Gross decrease - tax positions in prior periods		—		—
Gross increase - tax position in current period		357	$	246
Settlements		—		—
Lapses in statutes of limitations		—		—
Ending balance	$	4,650	$	4,293

As of December 31, 2022 and 2021, none of the unrecognized tax benefits would impact the Company's effective tax rate due to the valuation allowance. The Company does not anticipate the uncertain tax positions will materially change in the next 12 months. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the accompanying consolidated balance sheets as of December 31, 2022 and 2021, respectively, and has not recognized penalties and interest in the accompanying statements of operations for the years ended December 31, 2022 and 2021, respectively.

The Company is subject to taxation in the United States, California, Massachusetts, and Michigan. The Company’s tax years from inception are subject to examination by the IRS and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits.