Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

There was no provision for income taxes for the years ended December 31, 2021 and 2020, because the Company has incurred losses since inception. At December 31, 2021 and 2020 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, 2021 and 2020, 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:

U.S. federal provision (benefit)	2021		2020
At statutory rate	$	(5,906)	$	(4,033)
State taxes	(3,887)		(1,799)
Valuation allowance	9,154		6,395
Tax credits	(767)		(604)
Stock-based compensation	1,366		37
Permanent differences	40		4
Total	$	—	$	—

Significant components of the Company’s deferred tax assets at December 31, 2021 and 2020 are shown below.

	2021		2020
Deferred tax assets:
Net operating losses	$	125,111	$	23,943
Research and development tax credits	16,670		4,597
Amortization	1,094		78
Lease liability	1,027		714
Stock based compensation	3,784		254
Other	254		204
Total gross deferred tax assets	147,940		29,790
Less: valuation allowance	(146,933)		(29,073)
Total deferred tax assets	1,007		717
Deferred tax liability:
Right-of-use assets	(903)		(550)
Fixed assets	(104)		(167)
Total gross deferred tax liabilities	(1,007)		(717)
Net deferred tax assets	$	—	$	—

The deferred tax assets and valuation allowance increased by $117.9 million from December 31, 2020 to December 31, 2021 due primarily to the Millendo reverse merger, the generation of net operating losses, and research and development credits.

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. As of December 31, 2020, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $80.9 million and $80.3 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 $231.2 million are not subject to expiration.

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 Company also has $7.4 million of Orphan Drug Credit. As of December 31, 2020, the Company has federal and state research and development carryforwards of approximately $3.9 million and $1.9 million, respectively. The federal and state credits begin to expire in 2031 and 2029, respectively, if not utilized; $2.1 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, 2021. 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, 2021 and 2020:

	2021		2020
Beginning balance	$	1,280	$	1,080
Gross increase - tax positions in prior periods	2,767		—
Gross decrease - tax positions in prior periods	—		—
Gross increase - tax position in current period	246		$	200
Settlements	—		—
Lapses in statutes of limitations	—		—
Ending balance	$	4,293	$	1,280

As of December 31, 2021 and 2020, 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, 2021 and 2020, respectively, and has not recognized penalties and interest in the accompanying statements of operations for the years ended December 31, 2021 and 2020, 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.