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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
No provision for income taxes was recorded for the years ended December 31, 2023 and 2022. The Company has incurred net operating losses only in the United States since its inception. The Company has not reflected any benefit of such net operating loss carryforwards in the financial statements.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate was as follows:
Year Ended December 31,
20232022
Federal statutory income tax rate ate21.00 %21.00 %
State taxes1.01 1.10 
Others(0.06)(0.69)
Research and development credits1.00 1.11 
Transaction costs(1.01)— 
Lease Modification3.27 — 
Interest expense— — 
Stock-based compensation(1.52)(0.97)
Change in valuation allowance(23.69)(21.55)
Provision for taxes0.00 %0.00 %
Net deferred tax assets and liabilities consisted of the following (in thousands):
Year Ended December 31,
20232022
Deferred tax assets:
Net operating losses - non-current$30,820 $15,940 
Capitalized R&D14,493 13,815 
General business credit - non-current7,201 5,699 
Operating lease right-of-use assets88 1,220 
Lease termination costs6,621 — 
Stock based compensation2,017 1,703 
Accruals and reserves295 735 
Fixed assets6,161 170 
Other3 3 
Gross deferred tax assets67,699 39,285 
Valuation allowance(67,626)(38,110)
Net deferred tax assets73 1,175 
Fixed asset basis— — 
Operating lease liabilities(73)(1,175)
Other— — 
Gross deferred tax liabilities(73)(1,175)
Valuation allowance$— $— 
Net operating losses and tax credit carryforwards were as follows as of December 31, 2023 (dollars in thousands):
Year Ended December 31, 2023
AmountExpiration Years
Net operating losses, federal (starting from January 1, 2018)$146,450 Do Not Expire
Net operating losses, state29 2039 - 2043
Tax credits, federal6,395 2041 - 2043
Tax credits, state4,716 Do Not Expire
Utilization of the net operating loss carryforwards and research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code, as amended, (“IRC”), and similar state provisions. Annual limitations may result in the expiration of the net operating losses and tax credit carryforwards before they are utilized. The Company did not perform an IRC Section 382 analysis and any previous ownership changes may result in a limitation that will reduce the total amount of net operating loss and tax credit carryforwards disclosed that can be utilized. Subsequent ownership changes may affect the limitation in future years.
During the years ended December 31, 2023 and 2022, the Company recorded a full valuation allowance on federal and state deferred balances since management does not forecast the Company to be in a profitable position in the near future. Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2023 and 2022 related primarily to the increases in net operating loss carryforwards and research and development tax credit carryforwards and were as follows (in thousands):
Year Ended December 31,
20232022
Valuation allowance at the beginning of the year$38,110 $16,332 
Increases recorded to income tax provision29,516 21,778 
Valuation allowance at the end of the year$67,626 $38,110 
The Company’s U.S. federal and state income tax returns are generally subject to tax examinations for the tax years from inception through December 31, 2022. There are currently no pending income tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
20222022
Balance at beginning of year$2,701 $1,407 
Additions based on tax positions related to current year899 1,862 
Reduction for prior period positions(42)(568)
Unrecognized tax benefit-December 31$3,558 $2,701 
The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. The Company has elected to include interest and penalties as a component of tax expense. During the years ended December 31, 2023 and 2022, the Company did not recognize accrued interest and penalties related to unrecognized tax benefits. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease during the next 12 months.
Income Taxes
The components of the income tax expense (benefit) were as follows (in thousands):
Year Ended December 31,
20222023
Current
Federal
$322 $(164)
State
25 (15)
Total current
347 (179)
Deferred
Federal
— — 
State
— — 
Total deferred
— — 
Total income tax expense (benefit)
$347 $(179)
A reconciliation of the Company’s income tax expense (benefit) to the amount computed by applying the federal statutory income tax rate is summarized as follows (in thousands):
Year Ended December 31,
20222023
Expected tax benefit computed at federal statutory rate
$(2,192)$(14,731)
State income taxes, net of federal tax benefit
(2)(1,153)
Permanent differences
70 120 
Research and development credit carryforwards
(1,788)(5,472)
Reserve for uncertain tax positions
140 1,517 
Other
203 (463)
Change in valuation allowance
3,916 20,003 
Income tax expense (benefit)
$347 $(179)
Significant components of the Company’s net deferred tax assets (liabilities) are summarized as follows (in thousands):
Year Ended December 31,
20222023
Deferred tax assets
Net operating loss carryforwards
$152 $3,975 
Research and development credit carryforwards
982 6,269 
Capitalized research and development
5,044 15,282 
Intangible assets
249 531 
Share-based compensation
137 290 
Other
220 463 
Total deferred tax assets
6,784 26,810 
Valuation allowance
(6,727)(26,736)
Net deferred tax assets
57 74 
Deferred tax liabilities
Other
(57)(74)
Total deferred tax liabilities
57 74 
Net deferred tax assets
$— $— 
The Tax Cuts and Jobs Act (TCJA) requires taxpayers to capitalize and amortize research and development (R&D) expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during the year ended December 31, 2022, resulting in a gross deferred tax asset for capitalized R&D costs of approximately $66.0 million as of December 31, 2023. The Company will continue to amortize these costs for tax purposes over 5 years for R&D performed in the U.S. and over 15 years for R&D performed outside the U.S.
Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined it is more likely than not that the assets will not be realized. Due to uncertainties surrounding the realizability of the deferred tax assets, the Company maintains a full valuation allowance against its deferred tax assets at December 31, 2022 and 2023.
The Company had a valuation allowance of $26.7 million at December 31, 2023 to offset the net deferred tax assets as realization of such assets is uncertain. The valuation allowance increased by $20.0 million during the year ended December 31, 2023.
At December 31, 2023, the Company had federal and state net operating loss (NOL) carryforwards of $18.1 million and $17.9 million, respectively. Federal NOL carryforwards of $18.1 million generated after 2017 may be carried forward indefinitely but can only be utilized to offset 80% of future taxable income. State NOL carryforwards totaling $17.2 million begin to expire in 2040, unless previously utilized, and $0.6 million that carryforward indefinitely. In addition, the Company also has federal and state R&D credit carryforwards totaling $6.5 million and $0.5 million, respectively. The federal R&D credit carryforwards will begin to expire in 2040 unless previously utilized. The state R&D credit carryforwards will begin to expire in 2042 unless previously utilized.
Utilization of NOL carryforwards and other tax attributes, including those obtained through the Merger, may be subject to substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, due to
ownership change limitations that have occurred previously or that could occur in the future. An ownership change occurs, generally, if the percentage of stock of the loss corporation owned by one or more 5% shareholders has increased by more than 50 percentage points relative to the lowest percentage of stock of the loss corporation owned by the same 5% shareholders at any time during the testing period (generally, the three-year period preceding a testing date). These ownership changes may limit the amount of NOL carryforwards and tax credits that can be utilized annually to offset future taxable income. State NOL carryforwards and other state tax attributes may be similarly limited. The Company completed a Section 382 analysis through December 31, 2022 and it was determined the Company underwent an ownership change as defined under Section 382 on April 21, 2021. It was determined that based on the calculations, no attribute carryovers will expire without utilization as a result of Section 382 limitations from the April 21, 2021 ownership change. The Company’s use of NOL and credit carryforwards could be limited further by the provisions of Section 382 depending on the timing and amount of additional equity securities that the Company has issued or will issue subsequent to December 31, 2022, including those obtained through the Merger to the extent the Company or Graphite experiences an ownership change through or subsequent to the Merger.
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. Income tax positions must meet a more likely than not recognition at the effective date to be recognized. As of December 31, 2022 and 2023, the Company had no unrecognized tax benefits that, if recognized and realized, would effect the effective tax rate due to the valuation allowance against deferred tax assets.
The following table summarizes the changes to the Company’s gross unrecognized tax benefits (in thousands):
Year Ended December 31,
20222023
Balance at beginning of year
$— $131 
Increases related to prior year tax positions
28 6 
Increases related to current year tax positions
103 1,816 
Balance at end of year
131 1,953 
The Company's policy is to recognize interest and penalties related to income tax matters as income tax expense. The Company had no accrual for interest or penalties on the Company's balance sheets at December 31, 2022 or 2023, and has not recognized interest and/or penalties in the statement of operations and comprehensive loss for the years ended December 31, 2022 and 2023. As of December 31, 2022 and 2023, the Company had unrecognized tax benefits of $0.1 million and $1.7 million, respectively, which if recognized currently, should not impact the effective tax rate due to the Company maintaining a full valuation allowance. The Company does not expect that there will be a significant change in the unrecognized tax benefit over the next twelve months.
The Company is subject to taxation in the U.S. federal and various state jurisdictions. All of the Company’s tax years are subject to examination by federal and state tax authorities due to the carryforward of unutilized net operating losses and R&D credits. Further the Company is not currently under examination by any federal, state or local tax authority.