Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

9. INCOME TAXES

There was no provision for income taxes for the years ended December 31, 2023 and 2022, because the Company has incurred losses since inception. At December 31, 2023 and 2022 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, 2023 and 2022, 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 (in thousands):

	2023			2022
U.S. federal provision (benefit)
At statutory rate	$	(6,192	)	$	(7,497	)
State taxes		(2,492	)		(2,733	)
Valuation allowance		9,129			8,581
Tax credits		(836	)		(1,173	)
Stock-based compensation		371			2,606
Permanent differences		20			216
Total	$	—		$	—

Significant components of the Company’s deferred tax assets at December 31, 2023 and 2022 are shown below.

	2023			2022
Deferred tax assets:
Net operating losses	$	136,901		$	131,346
Research and development tax credits		19,240			18,122
Amortization		730			916
Lease liability		3,018			3,504
Stock based compensation		809			576
Other		449			378
Capitalized R&D		6,466			4,138
Fixed assets		—			10
Total gross deferred tax assets		167,613			158,990
Less: valuation allowance		(164,643	)		(155,514	)
Total deferred tax assets		2,970			3,476
Deferred tax liability:
Right-of-use assets		(2,970	)		(3,476	)
Total gross deferred tax liabilities		(2,970	)		(3,476	)
Net deferred tax assets	$	—		$	—

The valuation allowance increased by $9.1 million from December 31, 2022 to December 31, 2023 due primarily to the generation of net operating losses and research and development credits.

As of December 31, 2023, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $482.1 million and $457.8 million, respectively. 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.

The federal and state net operating loss carryforwards begin to expire in 2031 and 2023, respectively, if not utilized. Federal net operating losses of $260.9 million are not subject to expiration.

As of December 31, 2023, the Company has federal and state research and development carryforwards of approximately $12.7 million and $4.0 million, respectively. The Company also has $7.4 million of Orphan Drug Credit. 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 federal and state credits begin to expire in 2031 and 2029, respectively, if not utilized; $2.9 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, 2023. 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, 2023 and 2022:

	2023		2022
Beginning balance	$	4,650	$	4,293
Gross increase - tax position in current period		273		357
Ending balance	$	4,923	$	4,650

As of December 31, 2023 and 2022, 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/or 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, 2023 and 2022, respectively, and has not recognized penalties and/or interest in the accompanying statements of operations for the years ended December 31, 2023 and 2022, 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.