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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes
9.
Income Taxes

During the years ended December 31, 2023, and 2022, the Company recorded no income tax benefits for the net operating losses incurred in each year due to its uncertainty of realizing a benefit from those items.

The domestic and foreign components of loss before income taxes are as follows.

 

 

 

Years ended December 31,

 

 

 

2023

 

 

2022

 

Domestic

 

$

(36,948

)

 

$

(35,339

)

Foreign

 

 

(1

)

 

 

(16

)

 

$

(36,949

)

 

$

(35,355

)

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Federal statutory income tax rate

 

 

21.0

%

 

 

21.0

%

State taxes, net of federal benefit

 

 

4.9

 

 

 

6.2

 

Change in state tax rate

 

 

(1.7

)

 

 

(7.9

)

Federal and state research and development tax credit

 

 

8.2

 

 

 

1.1

 

Nondeductible permanent differences

 

 

(1.0

)

 

 

(1.0

)

Stock compensation forfeitures - DTA Write Off

 

 

(1.8

)

 

 

—

 

Change in deferred tax asset valuation allowance

 

 

(29.6

)

 

 

(19.3

)

Effective income tax rate

 

 

0.0

%

 

 

0.0

%

 

Net deferred tax assets as of December 31, 2023 and 2022 consisted of the following:

 

 

 

2023

 

 

2022

 

Deferred tax assets:

 

 

 

 

 

 

Capitalized R&D - acquired in merger with Zafgen

 

$

66,678

 

 

$

66,941

 

Capitalized R&D - Section 174 Costs post 2021

 

 

9,411

 

 

 

5,019

 

Stock based compensation

 

 

3,490

 

 

 

2,709

 

Net operating loss carryforwards

 

 

45,195

 

 

 

42,204

 

Tax credit carryforwards

 

 

16,319

 

 

 

13,284

 

Other temporary differences

 

 

21

 

 

 

20

 

Accruals & reserves

 

 

19

 

 

 

19

 

Fixed assets & intangibles

 

 

107

 

 

 

81

 

Operating lease liability

 

 

1,298

 

 

 

1,355

 

Total deferred tax assets

 

$

142,538

 

 

$

131,632

 

Deferred tax liabilities:

 

 

 

 

 

 

Operating right of use asset

 

 

(768

)

 

 

(801

)

Total deferred tax liabilities

 

$

(768

)

 

$

(801

)

Less: Valuation allowance

 

$

(141,770

)

 

$

(130,831

)

Net deferred tax assets / (liabilities)

 

$

—

 

 

$

—

 

 

Changes in the valuation allowance for deferred tax assets during the year ended December 31, 2023 and 2022 related primarily to the increase in net operating loss carryforwards and tax credit carryforwards and a decrease other deferred tax assets associated with a reduction in the Company’s effective state rate. Changes to the valuation allowance were as follows:

 

 

 

Years ended December 31,

 

 

 

2023

 

 

2022

 

Valuation allowance as of the beginning of the year

 

$

130,831

 

 

$

124,016

 

Increases recorded to income tax provision

 

 

10,939

 

 

 

6,815

 

Valuation allowance at end of year

 

$

141,770

 

 

$

130,831

 

As of December 31, 2023, the Company had net operating loss carryforwards that expire for federal, foreign and state income tax purposes of $179.0 million, $1.2 million and $148.1 million, respectively. The federal and state operating losses begin to expire in 2026 and 2030, while the foreign net loss carryforward can be carried forward indefinitely. As of December 31, 2023, the Company had federal net operating loss carryforwards that were generated after December 31, 2017 of $140.3 million that do not expire, however these carryforwards are limited to 80% of the taxable income in any one tax period. As of December 31, 2023, the Company also had available tax credit carryforwards for federal and state income tax purposes of $16.3 million which begin to expire in 2039. Utilization of the pre-Merger net operating loss carryforwards attributable to Zafgen, of approximately $33.5 million, are subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes occurred during the tax year associated with the Merger. In addition to the limitation of the pre-Merger NOL’s of Zafgen, the net capitalized R&D deferred tax assets in the amount of $66.9 million is subject to the built-in loss rules under Section 382 and may not be realized if the underlying asset associated with the R&D is disposed within five years of the Merger, or May 28, 2025. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The ownership changes will limit the amount of pre-merger Zafgen carryforwards that can be utilized annually to offset future taxable income with an annual limitation of approximately $35 thousand per year. The Company has reduced their NOL and R&D tax credit deferred tax assets associated with the pre-Merger Zafgen operations as a result of the 382 analysis.

The Company believes that as a result of its merger with Zafgen, its ability to utilize NOLs acquired in the transaction and our other NOLs is expected to be severely limited by Section 382 of the Code. Additionally, the Company’s July 2021, September 2022 and February 2023 equity transactions could also limit its ability to utilize NOLs in the future. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception. If the Company experienced a change of control, as defined by Section 382, at any time since inception, utilization of its net operating loss carryforwards or tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Additionally, our July 2021, September 2022 and February 2024 equity transactions could also limit our ability to utilize NOLs in the future. Any limitation may result in expiration of a portion of the net operating loss carryforwards or tax credit carryforwards before utilization. Further, until a study is completed, and any limitation is known, no amounts are being presented as an uncertain tax position.

The Tax Cuts and Jobs Act ("TCJA") requires taxpayers to capitalize and amortize research and experimental expenditures under IRC Section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during the year ended December 31, 2022 and resulted in the capitalization of research and development costs in both 2023 and 2022. The Company is amortizing these costs for tax purposes over five years if the research and development was performed in the U.S. and over 15 years if the research and development was performed outside the U.S.

As of December 31, 2023 and 2022, the Company’s net deferred tax asset balance before the valuation allowance was $141.8 million and $130.8 million, respectively, and was comprised principally of net operating loss carryforwards, capitalized research and development expenses and tax credit carryforwards. During the years ended December 31, 2023 and 2022, gross deferred tax assets increased due to deferred tax assets acquired as a result of additional net operating loss carryforwards and research and development tax credits generated.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2023 and 2022. Management reevaluates the positive and negative evidence at each reporting period.

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2023 and 2022. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2019 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.