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

11. Income Taxes

The Company’s loss before income taxes for the years ended December 31, 2023 and 2022 were generated in the following jurisdictions (in thousands):

 

Year Ended
December 31,

 

 

2023

 

 

2022

 

Domestic

 

$

(78,195

)

 

$

(96,781

)

Foreign

 

 

(358

)

 

 

31,383

 

Worldwide

 

$

(78,553

)

 

$

(65,398

)

 

 

The foreign income for the year-ended December 31, 2022 was due to the transfer of intellectual property, or IP, from PepGen Limited to the parent company, PepGen Inc., in an arm’s length transaction at fair value pursuant to an asset transfer agreement.

 

The components of net deferred income taxes consisted of the following as of December 31, 2023 and 2022 (in thousands):

 

 

December 31,

 

 

2023

 

 

2022

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

8,038

 

 

$

474

 

Research and development credits

 

 

4,547

 

 

 

1,287

 

Accrued expenses

 

 

577

 

 

 

523

 

Capitalized Section 174 R&D Costs

 

 

29,470

 

 

 

11,818

 

Stock compensation

 

 

2,510

 

 

 

1,081

 

Right-of-use liability

 

 

5,485

 

 

 

5,760

 

Intangible asset amortization

 

 

7,425

 

 

 

6,879

 

Other, net

 

 

21

 

 

 

—

 

Deferred tax assets

 

 

58,073

 

 

 

27,822

 

Deferred tax liabilities

 

 

 

 

 

 

Right-of-use-Asset

 

 

(6,444

)

 

 

(6,233

)

Fixed Assets

 

 

(1,474

)

 

 

(45

)

Other, net

 

 

—

 

 

 

(2

)

Deferred tax liabilities

 

 

(7,918

)

 

 

(6,280

)

Net deferred tax assets

 

 

50,155

 

 

 

21,542

 

Valuation allowance

 

 

(50,155

)

 

 

(21,542

)

Net deferred tax assets

 

$

—

 

 

$

—

 

The components of income tax expense were as follows for the years ended December 31, 2023 and 2022 (in thousands):

 

 

Year Ended
December 31,

 

 

2023

 

 

2022

 

Current expense:

 

 

 

 

 

 

   U.S. Federal

 

$

—

 

 

$

—

 

   State

 

 

73

 

 

 

23

 

   Foreign

 

 

—

 

 

 

3,683

 

Total current expense

 

 

73

 

 

 

3,706

 

Deferred expense:

 

 

 

 

 

 

   U.S. Federal

 

 

—

 

 

 

—

 

   State

 

 

—

 

 

 

—

 

   Foreign

 

 

—

 

 

 

—

 

Total deferred expense

 

 

—

 

 

 

—

 

Provision for income taxes

 

$

73

 

 

$

3,706

 

 

 

A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to the loss from operations is summarized for the years ended December 31, 2023 and 2022, as follows:

 

 

Year Ended
December 31,

 

 

2023

 

 

2022

 

Tax at statutory rate

 

 

21.0

%

 

 

21.0

%

State tax (net of federal benefit)

 

 

(0.7

)%

 

 

(0.0

)%

Permanent differences

 

 

(0.4

)%

 

 

(0.1

)%

Research and development credit

 

 

3.2

%

 

 

1.6

%

GILTI Inclusion

 

 

0.0

%

 

 

(8.9

)%

U.K. R&D credit

 

 

0.0

%

 

 

0.0

%

Foreign rate differential

 

 

0.0

%

 

 

(1.0

)%

Change in valuation allowance

 

 

(23.9

)%

 

 

(23.4

)%

Other

 

 

0.0

%

 

 

5.0

%

Income tax expense (benefit)

 

 

(0.8

)%

 

 

(5.8

)%

The Company’s income tax expense was $0.1 million for the year ended December 31, 2023 and $3.7 million for the year ended December 31, 2022. The income tax expense for the year ended December 31, 2023 was state taxes on interest income generated from the Company's cash equivalents and marketable securities. The income tax expense for the year ended December 31, 2022 was due to the IP transfer noted in the paragraph below.

On January 1, 2022, or the Transfer Date, the Company’s wholly owned subsidiary, PepGen Limited, transferred all IP assets to the parent company, PepGen Inc., in an arm’s length transaction at fair value pursuant to an asset transfer agreement. The fair value of the IP assets was a non-recurring fair value measurement. The Company engaged valuation specialists to calculate the IP value, and the IP value was measured using the historical cost method. The historical cost method estimated the fair value of the IP assets using the historical cost base of the IP assets and the expected market return as of the Transfer Date. The significant assumption inherent in estimating the fair value using the historical cost method was the expected market return. The Company utilized a 40% expected market return, which a third-party investor may expect as a return on their investment, and which is based on studies of venture capital investment returns. The Company calculated the fair value of the IP assets by computing the present value of the historical cost base using the 40% expected market return. The expected market return assumption used in the estimation of the IP assets represents a Level 3 input of the fair value hierarchy (see Note 3).

The Company has federal net operating losses, or NOLs of $23.4 million and federal research and development, or R&D, credits of approximately $4.9 million as of December 31, 2023, before consideration of limitations under Section 382 of the Internal Revenue Code, or Section 382, as further described below. The R&D credits will expire beginning in 2041. The Company has state NOLs of $36.6 million and state R&D credits of $1.3 million which begin expiring in 2042.

The future utilization of the Company’s state NOLs and federal and state R&D credits to offset future taxable income may be subject to a substantial annual limitation as a result of changes in ownership by stockholders that hold 5% or more of the Company’s common stock. An assessment of such ownership changes under Section 382 was not completed through December 31, 2023. To the extent that an assessment is completed in the future, the Company’s ability to utilize tax attributes could be restricted on a year-by-year basis and certain attributes could expire before they are utilized. The Company will examine the impact of any potential ownership changes in the future.

The Company is subject to taxation in the U.S. and the U.K. The Company’s federal and state returns since inception are subject to examination due to the carryover of NOLs. The Company has not been, nor is it currently, under examination by any tax authorities. The U.K. tax returns from 2018 and forward are subject to examination by the U.K. tax authorities.

The following table summarizes the reconciliation of the beginning and ending amount of total unrecognized tax benefits for each of the periods indicated:

 

 

December 31,

 

 

2023

 

 

2022

 

Balance at beginning of the period

 

$

673

 

 

$

—

 

Increase related to current year tax positions

 

 

—

 

 

 

751

 

Increase related to prior year tax positions

 

 

—

 

 

 

—

 

Decrease related to prior year tax positions

 

 

—

 

 

 

—

 

Currency translation

 

 

40

 

 

 

(78

)

Balance at the end of the period

 

$

713

 

 

$

673

 

The Company does not expect the amount of unrecognized tax benefits to change significantly in the next twelve months. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. It had no accrual for interest or penalties on its consolidated balance sheets at December 31, 2023 or 2022. No interest and/or penalties were recognized in 2023 or 2022.