Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

There was no provision for income taxes for the years ended December 31, 2023, and 2022, due to the Company’s operating losses and a full valuation allowance on deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):

	Year Ended December 31,
	2023			2022
U.S.	$	(5,181	)	$	(44,063	)
International		(82	)		(15	)
Loss before benefit from income taxes	$	(5,263	)	$	(44,078	)
Income tax benefit using U.S. federal statutory rate	$	(1,105	)	$	(9,256	)
State income taxes, net of federal benefit		(5	)		(2,693	)
Non-deductible share-based compensation		(9	)		266
Share-based compensation - shortfalls/(windfalls)		1,196			833
Permanent differences		1			14
Tax credits		(500	)		(1,652	)
Other		17			3
Change in valuation allowance		405			12,485
	$	—		$	—

The effective income tax rate is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our income tax rate in foreign jurisdictions is lower than our income tax rate in the United States.

Deferred tax assets (liabilities) consist of the following as of December 31, 2023 and 2022 (in thousands):

	Year Ended December 31,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	48,535		$	47,079
Tax credit carryforwards		10,388			9,848
Share-based compensation		7,071			8,354
Property and equipment		—			1
Capitalized research and development		16,440			17,399
Accruals and reserves		2			340
Total deferred tax assets	$	82,436		$	83,021
Deferred tax liabilities:
Operating lease - right of use asset	$	—		$	(333	)
Prepaid sublease termination		—			(658	)
Total deferred tax liabilities		—			(991	)
Net deferred tax assets		82,436			82,030
Valuation allowance		(82,436	)		(82,030	)
Net deferred tax assets	$	—		$	—

Management has evaluated the positive and negative evidence bearing upon the possible realization of its deferred tax assets. Management has considered the Company's history of operating losses, in addition to the expected timing of the reversal of existing temporary differences and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. Accordingly, the net deferred tax assets have been fully reserved at December 31, 2023 and December 31, 2022. Management reevaluates the positive and negative evidence on a quarterly basis.

The valuation allowance increased by approximately $0.4 million during the year ended December 31, 2023 primarily due to increases in capitalized research and development expenses, net operating losses, tax credit carryforwards and deferred tax assets related to share-based compensation.

The Company did not generate net operating loss carryforwards or tax credit carryforwards available for its use until its inception and operation as a standalone legal entity. At December 31, 2023 and 2022, Cyclerion has federal net operating loss carryforwards of approximately $177 million and $172 million, respectively, to offset future federal taxable income that will be carried forward indefinitely until utilized. As of December 31, 2023, and 2022, Cyclerion had state net operating loss carryforwards of approximately $178 million and $173 million, respectively, to offset future state taxable income, which will begin to expire in 2040 and will continue to expire through 2042. Cyclerion also had tax credit carryforwards of approximately $10.8 million and $10.2 million as of December 31, 2023 and 2022, respectively, to offset future federal and state income taxes. Federal credits begin to expire in 2040 and will continue to expire through 2041. State credits begin to expire in 2022 and continue through 2034.

The Company’s ability to use its operating loss carryforwards and tax credits to offset future taxable income could be subject to restrictions under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). These potential restrictions may limit the future use of the operating loss carryforwards and tax credits if certain ownership changes described in the Internal Revenue Code occur. Changes in stock ownership may occur that would create these limitations on the Company’s use of the operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.

The Company has not as yet conducted a study of its research and development credit carry forwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheets or statements of operations if an adjustment were required.

Upon audit, taxing authorities may challenge all or part of an uncertain income tax position. While Cyclerion has no history of tax audits since its inception on a standalone basis, it may be subject to tax audits by federal and state taxing authorities in the future. Accordingly, Cyclerion regularly assesses the outcome of potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. Cyclerion had no unrecognized tax benefits as of December 31, 2023 and 2022. Cyclerion will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2023 and 2022, no interest or penalties have been accrued. There are no current federal or state income tax audits in progress.