OnKure Therapeutics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data 127 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 129 Consolidated Balance Sheets 130 Consolidated Statements of Operations and Comprehensive Loss 131 Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) 132 Consolidated Statements of Cash Flows 133 Notes to Consolidated Financial Statements 134 128 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Reneo Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Reneo Pharmaceuticals, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. The Company’s Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Adoption of ASU No. 2016-02 As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2022 due to the adoption of ASU No. 2016-02, Leases (Topic 842) and related amendments. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2018. San Diego, California March 27, 2023 129 Table of Contents RENEO PHARMACEUTICALS, INC. Consolidated Balance Sheets (In thousands, except par value and share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 19,927 $ 124,660 Short-term investments 81,246 23,010 Prepaid expenses and other current assets 5,180 6,064 Total current assets 106,353 153,734 Property and equipment, net 453 212 Right-of-use assets 1,292 — Other non-current assets 84 78 Total assets $ 108,182 $ 154,024 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,893 $ 2,022 Accrued expenses 4,827 4,180 Operating lease liabilities, current portion 404 — Total current liabilities 7,124 6,202 Operating lease liabilities, less current portion 1,059 — Other long-term liabilities — 167 Performance award 29 444 Total liabilities 8,212 6,813 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.0001 par value; 200,000,000 shares authorized at December 31, 2022 and December 31, 2021; 24,699,553 shares issued and outstanding at December 31, 2022; and 24,457,838 and 24,455,390 shares issued and outstanding at December 31, 2021, respectively 3 3 Additional paid-in capital 236,693 231,902 Accumulated deficit ( 136,683 ) ( 84,728 ) Accumulated other comprehensive (loss) income ( 43 ) 34 Total stockholders’ equity 99,970 147,211 Total liabilities and stockholders’ equity $ 108,182 $ 154,024 The accompanying notes are an integral part of these consolidated financial statements. 130 Table of Contents RENEO PHARMACEUTICALS, INC. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Year Ended December 31, 2022 2021 Operating expenses: Research and development $ 37,705 $ 28,169 General and administrative 16,143 11,649 Total operating expenses 53,848 39,818 Loss from operations ( 53,848 ) ( 39,818 ) Other income 1,893 48 Net loss ( 51,955 ) ( 39,770 ) Unrealized (loss) gain on short-term investments ( 77 ) 34 Comprehensive loss $ ( 52,032 ) $ ( 39,736 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 2.12 ) $ ( 2.19 ) Weighted-average shares used in computing net loss per share, basic and diluted 24,496,425 18,143,487 The accompanying notes are an integral part of these consolidated financial statements. 131 Table of Contents RENEO PHARMACEUTICALS, INC. Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity ( Deficit) (In thousands, except share data) Convertible Preferred Stock Additional Accumulated Other Total Series A Series B Common Stock Paid-In Comprehensive Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balances, December 31, 2020 24,302,472 $ 45,652 23,440,514 $ 47,068 2,053,070 $ — $ 2,843 $ — $ ( 44,958 ) $ ( 42,115 ) Issuance of series B convertible preferred stock, net of issuance costs of $ 29 — — 23,440,514 47,356 — — — — — — Conversion of convertible preferred stock into common stock upon initial public offering ( 24,302,472 ) ( 45,652 ) ( 46,881,028 ) ( 94,424 ) 15,907,629 2 140,076 — — 140,078 Issuance of common stock in initial public offering, net of offering costs 6,250,000 1 84,532 — — 84,533 Stock based compensation — — — — — — 3,891 — — 3,891 Issuance of common stock in connection with equity plans — — — — 244,691 — 560 — — 560 Other comprehensive income — — — — — — — 34 — 34 Net loss — — — — — — — — ( 39,770 ) ( 39,770 ) Balances, December 31, 2021 — $ — — $ — 24,455,390 $ 3 $ 231,902 $ 34 $ ( 84,728 ) $ 147,211 Stock based compensation — — — — — — 4,320 — — 4,320 Issuance of common stock in connection with the at-the-market facility — — — — 92,085 — 193 — — 193 Issuance of common stock in connection with equity plans — — — — 152,078 — 278 — — 278 Other comprehensive loss — — — — — — — ( 77 ) — ( 77 ) Net loss — — — — — — — — ( 51,955 ) ( 51,955 ) Balances, December 31, 2022 — $ — — $ — 24,699,553 $ 3 $ 236,693 $ ( 43 ) $ ( 136,683 ) $ 99,970 The accompanying notes are an integral part of these consolidated financial statements. 132 Table of Contents RENEO PHARMACEUTICALS, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities Net loss $ ( 51,955 ) $ ( 39,770 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 4,320 3,891 Depreciation and amortization 88 50 Amortization/accretion on short-term investments ( 817 ) 202 Changes in the fair value of performance award ( 415 ) 444 Non-cash lease expense 441 — Loss on disposal of fixed asset 17 — Changes in operating assets and liabilities: Prepaid expenses and other assets 878 ( 4,711 ) Accounts payable and accrued expenses 518 1,780 Operating lease liabilities ( 437 ) — Other current and long-term liabilities — 131 Net cash used in operating activities ( 47,362 ) ( 37,983 ) Cash flows from investing activities Purchases of property and equipment ( 346 ) ( 198 ) Purchase of available-for-sale short-term investments ( 101,596 ) ( 31,406 ) Proceeds from maturities of available-for-sale short-term investments 44,100 8,228 Net cash used in investing activities ( 57,842 ) ( 23,376 ) Cash flows from financing activities Proceeds from issuance of Series B convertible preferred stock, net of issuance costs — 47,238 Proceeds from initial public offering, net of offering costs — 84,612 Proceeds from at-the-market facility, net of offering costs 193 — Proceeds from issuance of common stock in connection with equity plans 278 556 Net cash provided by financing activities 471 132,406 Net (decrease) increase in cash and cash equivalents ( 104,733 ) 71,047 Cash and cash equivalents, beginning of year 124,660 53,613 Cash and cash equivalents, end of year $ 19,927 $ 124,660 Noncash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 1,733 $ — Noncash investing and financing activities: Vesting of unvested exercised options $ — $ 4 The accompanying notes are an integral part of these consolidated financial statements. 133 Table of Contents RENEO PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements 1. Organization and Business Organization Reneo Pharmaceuticals, Inc. (Reneo or the Company) commenced operations on September 22, 2014 as a clinical-stage pharmaceutical company focused on the development of therapies for patients with rare genetic mitochondrial diseases. In December 2017, the Company in-licensed mavodelpar (REN001), a novel oral peroxisome proliferator-activated receptor delta (PPAR δ ) agonist. Public Offerings On April 13, 2021, the Company completed an initial public offering (IPO) of its common stock. In connection with its IPO, the Company sold and issued 6,250,000 shares of its common stock at a price to the public of $ 15.00 per share. The gross proceeds from the IPO were approximately $ 93.8 million before deducting underwriting discounts and commissions of $ 6.6 million and offering expenses of approximately $ 2.6 million payable by the Company. At the closing of the IPO, 71,183,500 shares of outstanding convertible preferred stock were automatically converted into 15,907,629 shares of common stock. Following the IPO, there were no shares of preferred stock outstanding. In May 2022, the Company entered into an at-the-market equity offering sales agreement with SVB Securities LLC (ATM facility) under which it may offer and sell, from time to time at its sole discretion, up to $ 20.0 million in shares of its common stock. For the year ended December 31, 2022 , the Company has sold and issued approximately 100,000 shares of its common stock under the ATM facility. Liquidity The Company follows Accounting Standards Codification (ASC) Topic 205-40, Presentation of Financial Statements—Going Concern , which requires that management perform a two-step analysis over its ability to continue as a going concern. Management must first evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued (step 1). If management concludes that substantial doubt is raised, management is also required to consider whether its plans alleviate that doubt (step 2). From its inception in 2014, the Company has incurred significant losses and negative cash flows from operations. As of December 31, 2022, the Company had cash, cash equivalents and short-term investments of $ 101.2 million and an accumulated deficit of $ 136.7 million. The Company had a net loss of $ 52.0 million and used cash of $ 47.4 million for operating activities for the year ended December 31, 2022. Since inception through December 31, 2022, the Company has funded its operations primarily with the net proceeds from the issuance of convertible preferred stock and common stock. Management has prepared cash flow forecasts which indicate that based on the Company’s expected operating losses and negative cash flows, there is substantial doubt about the Company’s ability to continue as a going concern for twelve months after the date the consolidated financial statements for the year ended December 31, 2022 are issued. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty. 134 Table of Contents Due to the Company’s continuing research and development activities, the Company expects to continue to incur net losses into the foreseeable future and may never become profitable. The Company plans to fund its losses from operations and capital funding needs through public or private equity offerings or debt financings, credit or loan facilities, collaborations, strategic alliances, licensing arrangements or a combination of one or more of these funding sources. There can be no assurance that the Company will be successful in obtaining additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could negatively impact the Company’s business, results of operations, and future prospects. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions, disruptions to, and volatility in, financial markets in the United States and worldwide , including those resulting from the ongoing COVID-19 pandemic, bank failures, actual or perceived changes in interest rates and economic inflation . The Company may not be able to secure additional financing in a timely manner or on favorable terms, if at all. In addition, successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) and reflect the operation of the Company and its wholly owned subsidiary. All intercompany balances and transactions among the consolidated entities have been eliminated in consolidation. Use of Estimates The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates. Risks and Uncertainties Any product candidates developed by the Company will require approvals from the U.S. Food and Drug Administration or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s current product candidates will meet desired efficacy and safety requirements to obtain the necessary approvals. If approval is denied or delayed, it may have a material adverse impact on the Company’s business and its financial statements. The Company is subject to a number of risks similar to other clinical-stage pharmaceutical companies including, but not limited to, dependency on the clinical and commercial success of the Company’s product candidate, mavodelpar, ability to obtain regulatory approval of mavodelpar, the need for substantial additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians, consumers and third-party payors, significant competition and untested manufacturing capabilities, and dependence on key individuals and sole source suppliers. 135 Table of Contents Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of December 31, 2022 and 2021 , the Company had cash balances deposited at major financial institutions. Cash balances are subject to minimal credit risk as the balances are with high credit quality financial institutions. Cash and cash equivalents include cash in readily available checking, money market accounts and repurchase agreements. Short-term Investments The Company accounts for short-term investments in accordance with ASC Topic 320, Investments – Debt and Equity Securities . Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each reporting period. At December 31, 2022, the Company’s investments comprised of U.S. treasury securities and commercial paper classified as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity (deficit). Realized gains and losses on sales of investments are included in interest income and are derived using the specific identification method for determining the cost of securities. The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the amortized cost basis of such securities is judged to be other-than temporary impaired. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and if the entity has the intent to sell the security, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. The Company did no t recognize any other-than-temporary impairment charges on its short-term investments during the years ended December 31, 2022 and 2021. Money market account balances are included as cash and cash equivalents on the consolidated balance sheets, which are also disclosed in Note 3, Fair Value Measurements. Concentration of Credit Risk Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. 136 Table of Contents The following estimated useful lives were used to depreciate or amortize the Company’s assets: Estimated Useful Life Furniture and fixtures 5 years Computers and software 3 years Leasehold improvements Shorter of useful life or remaining lease term Impairment of Long-Lived Assets Long-lived assets consist primarily of property and equipment. Long-lived assets are evaluated for impairment when events and circumstances indicate the assets might be impaired by first comparing the estimated future undiscounted cash flows of the asset or asset group to the carrying value. If the carrying value exceeds the estimated future undiscounted cash flows, an impairment loss is recognized based on the amount that the carrying value exceeds the fair value of the asset or asset group. The Company did no t recognize impairment losses during the years ended December 31, 2022 and 2021 . Leases The Company determines if an arrangement includes a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company's lease terms may include options to extend or terminate a lease when it is reasonably certain that it will exercise that option. The Company combines lease and non-lease components when determining lease payments. Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, unless there is a transfer of title or purchase option the Company is reasonably certain to exercise. For leases where an implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of future lease payments. Lease expense for operating leases is recognized on a straight-line basis over the expected lease term. Research and Development Costs and Accruals All research and development costs are expensed as incurred. Research and development costs consist primarily of costs associated with manufacturing drug substance and drug product, costs associated with preclinical studies, clinical trials managed through contract research organizations (CROs) and other third parties, license fees, salaries and employee benefits. The Company bases its expense accruals related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on its behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under certain contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed, or services are performed. To date, the Company has not experienced significant changes in its estimates of accrued research and development expenses after a reporting period. License Fees The Company expenses amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when 137 Table of Contents acquired. Acquisitions of technology licenses are charged to expense or capitalized based upon management’s assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use. The Company has determined that technological feasibility for its product candidate would be reached when the requisite regulatory approvals are obtained to make the product available for sale. Contingent milestone payments are recognized when the related contingency is resolved, and the amounts are paid or become payable. These amounts are expensed to research and development if there is no alternative future use associated with the license or capitalized as an intangible asset if alternative future use of the license exists. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to unrecognized tax benefits. The Company is subject to taxation in the United States and the United Kingdom (UK). As of December 31, 2022 , the Company’s tax years since inception are subject to examination by taxing authorities in the United States, and the UK tax returns from 2018 forward are subject to examination. Stock-Based Compensation The Company recognizes stock-based compensation expense for grants under its 2014 and 2021 Equity Incentive Plans and employee stock purchase plan (ESPP). The Company accounts for all stock-based awards granted to employees and directors at their fair value and recognizes compensation expense over the award’s vesting period. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates of fair values of stock options as of the grant date. The Company calculates the grant date fair values of stock options using the Black-Scholes valuation model, which requires the input of subjective assumptions, including but not limited to expected stock price volatility over the term of the awards and the expected term of stock options. The fair value of restricted stock awards granted to employees is based on the quoted closing market price per share on grant date. The Company granted restricted stock awards with performance conditions that are based upon the achievement of pre-specified clinical development or regulatory performance events. As the outcome of each event has inherent risks and uncertainties, and a positive outcome may not be known until the event is achieved, the Company will begin to recognize the value of the performance-based restricted stock awards when the 138 Table of Contents achievement of each performance condition is deemed probable, a determination that requires significant judgment by management. Compensation cost is recognized under the accelerated method and is adjusted in future periods for subsequent changes in the expected outcome of the performance-related conditions. The Company granted restricted stock awards with market conditions. The Company measures the fair value of stock-based awards with market-based vesting conditions on the date of grant using a Monte Carlo simulation model. In accordance with accounting guidance for awards with market conditions, the stock-based compensation expense will be recognized over the derived service period regardless of whether the award achieves the market condition and will only be adjusted to the extent the service condition is not met. Foreign Currency Transactions The functional currency of Reneo Pharma Ltd, the Company’s wholly owned subsidiary in the UK, is the U.S. dollar. All foreign exchange transactional and remeasurement gains and losses are recognized in the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2022 and 2021 , total foreign currency gains and losses were immaterial. Comprehensive Income or Loss Comprehensive income or loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Net Loss Per Share The Company computes basic loss per share by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company has reported net losses for the years ended December 31, 2022 and 2021. As a result, the Company has, excluded all outstanding common stock equivalents including the Company’s stock options, performance-based and market-based RSUs, and employee stock purchase plan, from the diluted net loss per share calculation for the years ended December 31, 2022 and 2021 because such shares are anti-dilutive. The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect : As of December 31, 2022 2021 Common stock options outstanding 5,877,745 4,215,643 Unvested restricted stock units 329,500 299,500 Total 6,207,245 4,515,143 139 Table of Contents New Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (ASC 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheets for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires a lessee to recognize a liability for lease payments (lease liability) and a ROU asset (representing its right to use the underlying asset for the lease term) on the balance sheet. In July 2018, the FASB issued ASU 2018-11, Leases (ASC 842): Targeted Improvements , which provides entities an optional transition method to apply the new guidance as of the adoption date, rather than as of the earliest period presented. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the effective date, unless the lease was modified, to not reassess (a) whether a contract is or contains a lease, (b) lease classification or (c) determination of initial direct costs, which effectively allows entities to carryforward accounting conclusions under previous GAAP. The Company adopted this standard on January 1, 2022 , using the optional transitional method and elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022. As a result of implementing ASC 842, the Company recognized operating lease ROU assets of $ 1.5 million and lease liabilities of $ 1.7 million on January 1, 2022, with no impact on its beginning retained earnings, consolidated statements of operations and comprehensive loss, or cash flows. See Note 6, Leases , for further details. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes . The standard simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new guidance was effective for the Company as of January 1, 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company adopted this standard on January 1, 2022 . Adoption of this standard had no material impact on the Company’s consolidated financial position, results of operations or cash flows. Recent Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments . The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in the carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance is effective for the Company as of January 1, 2023. The Company is currently evaluating the impact of this ASU and does not expect that adoption of this standard will have a material impact on its consolidated financial statements and related disclosures. Other accounting standard updates effective for interim and annual periods beginning after December 31, 2022 are not expected to have a material impact on the Company’s financial position, results of operations or cash flows. 3. Fair Value Measurements ASC Topic 820, Fair Value Measurement , establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing an 140 Table of Contents asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. ASC Topic 820 identifies fair value as the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes between the following: • Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities. • Level 2 – Inputs, other than quoted prices in active markets, which are observable for the asset or liability, either directly or indirectly. • Level 3 – Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company’s financial assets are subject to fair value measurements on a recurring basis. The Company categorizes its money market funds as Level 1, using the quoted prices in active markets. Commercial paper and U.S. treasury securities are categorized as Level 2, using significant other observable inputs. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intends to hold these investments with unrealized losses for a reasonable period of time sufficient for the recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired for any of the periods presented. In connection with the Company's chief executive officer's (CEO) employment agreement, he is entitled to receive a special performance bonus in the amount of $ 7.5 million (Performance Award), payable in cash, common stock or a combination of cash and common stock, at the election of the Company, based on achievement of certain conditions as described in more detail in Note 8. The Company estimated the fair value of the Performance Award using a Monte Carlo simulation, which incorporates the stock price at the date of the valuation and utilizes Level 3 inputs such as volatility, probabilities of success, and other inputs that are not observable in active markets. The Performance Award is required to be measured at fair value on a recurring basis each reporting period, with changes in the fair value recognized in general and administrative expense in the consolidated statements of operations and comprehensive loss over the derived service period of the award. No assets or liabilities were transferred into or out of their classifications during the years ended December 31, 2 0 22 and 2021 . 141 Table of Contents The recurring fair value measurement of the Company’s assets and liabilities measured at fair value at December 31, 2022 consisted of the following (in thousands): Quoted Prices in Active Markets For Identical Items (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Cash and cash equivalents: Money market investments $ 9,365 $ — $ — $ 9,365 Commercial paper — 4,978 — 4,978 Short-term Investments: U.S. treasury securities — 76,253 — 76,253 Commercial paper — 4,993 — 4,993 Total $ 9,365 $ 86,224 $ — $ 95,589 Liabilities Performance award $ — $ — $ 29 $ 29 Total $ — $ — $ 29 $ 29 The recurring fair value measurement of the Company’s assets and liabilities measured at fair value at December 31, 2021 consisted of the following (in thousands): Quoted Prices in Active Markets For Identical Items (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Cash and cash equivalents: Money market investments $ 118,535 $ — $ — $ 118,535 Short-term Investments: Commercial paper — 23,010 — 23,010 Total $ 118,535 $ 23,010 $ — $ 141,545 Liabilities Performance award $ — $ — $ 444 $ 444 Total $ — $ — $ 444 $ 444 The following table sets forth a summary of changes in the fair value of the Company’s performance award liability (in thousands): Performance Award Balance as of January 1, 2022 $ 444 Change in fair value ( 415 ) Balance as of December 31, 2022 $ 29 142 Table of Contents The following tables summarize the gross unrealized gains and losses of the Company’s available-for-sale securities as of December 31, 2022 and 2021 (in thousands): As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value Available-for-sale securities: U.S. treasury securities $ 76,297 $ 2 $ ( 46 ) $ 76,253 Commercial paper 4,993 — — 4,993 Total $ 81,290 $ 2 $ ( 46 ) $ 81,246 As of December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value Available-for-sale securities: Commercial paper $ 23,013 $ — $ ( 3 ) $ 23,010 Total $ 23,013 $ — $ ( 3 ) $ 23,010 4. Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): As of December 31,  2022 2021 Computer, software and office equipment  $ 300  $ 315 Leasehold improvements  255  30 Total property and equipment, gross  555  345 Less: accumulated depreciation and amortization  ( 102 )  ( 133 ) Total property and equipment, net  $ 453  $ 212 5. Accrued Expenses Accrued expenses consisted of the following (in thousands): As of December 31, 2022 2021 Accrued clinical and regulatory $ 1,872 $ 1,236 Accrued contract manufacturing cost 1,583 1,482 Accrued compensation 807 1,027 Accrued research and development-other 565 435 Total accrued expenses $ 4,827 $ 4,180 6. Leases The Company’s headquarters are located in Irvine, California, where it leases office space. The Company leases additional office space located in San Diego, California, and in Sandwich, United Kingdom. The lease terms for the Irvine, San Diego, and Sandwich offices extend through November 30, 2026, July 31, 2023, and October 23, 2027, respectively. 143 Table of Contents On October 20, 2022, the Company entered into a lease agreement for of office space located in Sandwich, United Kingdom, with a term of 5 years and a termination option after three years , which commenced in December 2022. In connection with the lease, the Company recorded $ 0.2 million in ROU and lease liabilities at commencement date. At December 31, 2022, the weighted average incremental borrowing rate was 5 % and the weighted average remaining lease term was 3.9 years for the operating leases held by the Company. For the year ended December 31, 2022, cash paid for amounts included for the measurement of lease liabilities was $ 0.5 million. For the year ended December 31, 2022, the Company recorded operating lease expense of $ 0.5 million. Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: As of December 31, 2022 2023 $ 473 2024 381 2025 381 2026 343 2027 34 Total lease payments 1,612 Less: Imputed interest ( 149 ) Present value of lease liabilities $ 1,463 7. Convertible Preferred Stock Preferred Stock The Company has authorized up to 10,000,000 shares of preferred stock, $ 0.0001 par value per share, for issuance. The Company’s preferred stock will have such rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, which will be determined by its board of directors upon its issuance. As of December 31, 2022 , there were no shares of preferred stock outstanding. In connection with the IPO in April 2021, all outstanding shares of Series A convertible preferred and Series B convertible preferred stock were converted into 5,430,957 and 10,476,672 shares of common stock, respectively. 8. Stock-Based Compensation In March 2021, the Company’s board of directors adopted the Company’s 2021 Equity Incentive Plan (2021 Plan), which is the successor to the Company's 2014 Equity Incentive Plan (2014 Plan). As of the effective date of the 2021 Plan, awards granted under the 2014 Plan that are forfeited or otherwise become available under the 2014 Plan will be included and available for issuance under the 2021 Plan. Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards to individuals who are employees, officers, directors or consultants of the Company, and employees and consultants of the Company’s affiliates. Under the 2014 Plan, certain employees were granted the ability to early exercise their options. The shares of common stock issued pursuant to the early exercise of unvested stock options are restricted and continue to vest over the requisite service period after issuance. The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. The shares purchased by the employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be outstanding until those shares vest. As of December 31, 2022, there were no shares subject to stock options that have been early exercised. 144 Table of Contents Shares Reserved for Future Issuance As of December 31, 2022, the Company had reserved shares of its common stock for future issuance as follows: Shares Reserved Common stock options outstanding 5,877,745 Unvested restricted stock units 329,500 Available for future grants under the 2021 Equity Incentive Plan 546,521 Available for future grants under the 2021 Employee Stock Purchase Plan 383,917 Total shares of common stock reserved 7,137,683 Stock Options A summary of the Company’s stock option activity and related information for the year ended December 31, 2022 is as follows: Options Outstanding Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2021 4,215,643 $ 5.49 8.5 $ 13,530 Granted 2,067,976 2.51 Exercised ( 54,535 ) 2.01 Forfeited/Expired ( 351,339 ) 5.60 Outstanding at December 31, 2022 5,877,745 $ 4.47 8.2 $ 907 Vested at December 31, 2022 2,159,499 $ 5.20 6.7 $ 101 Exercisable at December 31, 2022 2,947,283 $ 5.12 7.0 $ 101 Options exercisable at December 31, 2022 include vested options and options eligible for early exercise. All outstanding options as of December 31, 2022 are expected to vest. Unrecognized stock-based compensation expense at December 31, 2022 was $ 10.0 million, which is expected to be recognized over a weighted-average vesting term of 2.9 years. The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows: Year Ended December 31, 2022 2021 Risk-free interest rate 3.4 % 0.9 % Expected volatility 84.8 % 78.3 % Expected term (in years) 6.0 6.0 Expected dividend yield — % — % Risk-free interest rate. The Company bases the risk-free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. Expected volatility. Since the Company does not have sufficient trading history for its common stock the expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry. 145 Table of Contents Expected term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period. Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends. Fair value of common stock . For periods prior to the Company's IPO in April 2021, since there had been no public market for the Company’s common stock, the Company’s board of directors, with input from management, determined the fair value of the Company’s common stock on each grant date by considering a number of objective and subjective factors, including the most recent independent third-party valuations of the Company’s common stock, sales of the Company’s convertible preferred stock to unrelated third-parties, operating and financial performance of the Company, the lack of liquidity of capital stock and general and industry-specific economic outlook, and the Company’s board of directors’ assessment of additional objective and subjective factors that it believed were relevant. Restricted Stock Units (RSUs) RSUs consist of performance-based units (PSUs) and market-based units (MSUs). The following table summarizes RSU activities as of December 31, 2022: Number of RSUs Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 299,500 $ 6.32 Granted 60,000 2.95 Cancelled ( 30,000 ) 6.69 Unvested at December 31, 2022 329,500 $ 5.67 Performance-Based Units The PSUs vest based on the Company achieving certain regulatory milestones and are subject to the employee’s continued employment with the Company through the achievement date. The fair value of the awards was based on the value of the Company’s common stock at the grant date of the award and expense recognition is based on the probability of achieving the performance conditions. Stock-based compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the performance conditions. The Company has 209,500 unvested shares underlying PSUs as of December 31, 2022. The Company concluded that achievement of the performance conditions was not probable as of December 31, 2022 and 2021 , and therefore no stock-based compensation expense was recognized for the years ended December 31, 2022 and 2021 in connection with the PSUs. As of December 31, 2022, unrecognized stock-based compensation expense related to the PSUs that were deemed not probable was $ 1.4 million. Market-Based Units The MSUs vest based on the Company’s closing stock price trading above $ 20 per share for 30 consecutive trading days subject to the employee’s continued employment with the Company through the date of achievement. The share price of the Company’s common stock on the date of issuance of the MSUs was $ 2.78 per share. The fair value was based on Monte Carlo simulation model on the grant date. Stock-based compensation expense is recognized over the derived service period of approximately 3 years. The Company has 120,000 unvested shares underlying MSUs as of December 31, 2022. Stock-based compensation expense related to the 146 Table of Contents MSUs during the years ended December 31, 2022 and 2021 was immaterial. As of December 31, 2022, there was $ 0.3 million of unrecognized stock-based compensation expense related to this MSU. Performance Award In connection with the CEO’s employment agreement, he is entitled to receive a Performance Award in the amount of $ 7.5 million, payable in cash, common stock or a combination of cash and common stock, at the election of the Company, in the event that (i) the Company’s market value exceeds $ 750 million utilizing the volume-weighted average of the closing sale price of its common stock on the Nasdaq Stock Market or other principal exchange for each of the 30 trading days immediately prior to the measurement date, or (ii) the fair market value of the net proceeds available for distribution to the Company’s stockholders in connection with a change in control as defined in the Company’s severance benefit plan, as determined in good faith by its board of directors, exceeds $ 750 million. The Company has determined that the Performance Award is subject to ASC 718, Compensation – Stock Compensation and includes both market and performance conditions. Since the IPO, neither of the events have yet been satisfied. The Company estimated the fair value of the Performance Award at each reporting period using the Monte Carlo simulation (Note 3), which is recognized as stock-based compensation expense over the derived service period. For the year ended December 31, 2022 , the Company reversed approximately $ 0.4 million in stock-based compensation expenses as a direct result of decreased value of the Performance Award caused by a decline in the Company’s common stock price. 2021 Employee Stock Purchase Plan In March 2021, the Company’s board of directors adopted the ESPP, which became effective immediately prior to the execution of the underwriting agreement in connection with the Company’s IPO. As of December 31, 2022 , 103,719 shares have been issued under the ESPP. In September 2021, the Company’s board of directors adopted the Company’s 2021 UK Sharesave Sub-plan (SAYE). An allocation of 25,875 shares of common stock from the ESPP reserve pool was approved and reserved for issuance under the SAYE. No shares have been issued under the SAYE through December 31, 2022. The stock-based compensation expense related to the ESPP and the SAYE for the year ended December 31, 2022 , was $ 0.2 million and was immaterial for the year ended December 31, 2021. Stock-Based Compensation Expense The following table summarizes stock-based compensation expense, including expense associated with award modifications for unvested options, reflected in the consolidated statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2022 2021 Research and development $ 1,593 $ 1,036 General and administrative 2,727 2,855 Total $ 4,320 $ 3,891 In December 2022, the Company's Compensation Committee approved an extension of the post-termination exercise period applicable to each outstanding stock option, approximately 613,000 shares, held by the Company's non-employee directors, such that upon the termination of service, each option will remain exercisable through 147 Table of Contents the lessor of i) three years or ii) end of the term of such option from the date of grant. The Company recognized $ 0.2 million in stock-based compensation expense related to this modification in December 2022. 9. License Agreement In December 2017, the Company entered into a license agreement with vTv Therapeutics LLC (vTv Therapeutics) (the vTv License Agreement), under which the Company obtained an exclusive, worldwide, sublicensable license under certain vTv Therapeutics intellectual property to develop, manufacture and commercialize peroxisome proliferator-activated receptor delta (PPARδ) agonists and products containing such PPARδ agonists, including mavodelpar, for any therapeutic, prophylactic or diagnostic application in humans. To date, the Company has paid a $ 3.0 million upfront payment and $ 2.0 million in milestone payments and issued an aggregate of 576,443 shares of its common stock to vTv Therapeutics. Upon the achievement of certain pre-specified development and regulatory milestones, the Company is also required to pay vTv Therapeutics milestone payments totaling up to $ 64.5 million. The Company is also required to pay vTv Therapeutics up to $ 30.0 million in total sales-based milestones upon achievement of certain sales thresholds of the licensed product. In addition, the Company is obligated to make royalty payments to vTv Therapeutics at mid-single digit to low teen percentage royalty rates, based on tiers of annual net sales of licensed products, subject to certain customary reductions. A milestone payment of $ 2.0 million was achieved and recorded for the year ended December 31, 2021. There were no milestone payments achieved or recorded for the year ended December 31, 2022. 10. Income Taxes The Company’s net loss was generated in the following jurisdictions (in thousands): Year Ended December 31, 2022 2021 Domestic $ ( 51,994 ) $ ( 39,718 ) Foreign 39 ( 52 ) Net loss $ ( 51,955 ) $ ( 39,770 ) The components of net deferred taxes consisted of the following (in thousands): As of December 31, 2022 2021 Deferred tax assets: NOL carryforwards $ 16,381 $ 13,446 Capitalized research and development expenses 7,465 — Credit carryforwards 4,061 2,155 Intangible assets 3,202 3,469 Compensation accruals 989 653 Operating lease liabilities 316 — Depreciation 78 104 Other accruals and reserves — 35 Other 2 2 Gross deferred tax assets 32,494 19,864 Less valuation allowance ( 32,214 ) ( 19,864 ) Total deferred tax assets 280 — Deferred tax liabilities: ROU assets ( 280 ) — Net deferred tax assets (liabilities) $ — $ — 148 Table of Contents For the years ended December 31, 2022 and 2021 , the Company recorded no provision for income taxes. A reconciliation of the effective tax rate 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, 2022 and 2021, as follows: As of December 31, 2022 2021 U.S. federal statutory income tax rate 21.0 % 21.0 % Tax credits, net 3.4 % 3.5 % Return-to-provision adjustment 0.5 % ( 0.1 )% Other ( 0.8 )% ( 1.0 )% GILTI inclusion ( 0.3 )% ( 0.5 )% Valuation allowance ( 23.8 )% ( 22.9 )% U.S. federal effective tax rate 0.0 % 0.0 % The Company had federal net operating loss (NOL) carryforwards available of approximately $ 74.7 million as of December 31, 2022, before consideration of limitations under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), as further described below. The federal NOLs generated after 2017 of $ 73.1 million will carry forward indefinitely. NOLs generated prior to 2018 of $ 1.6 million will begin to expire in 2034 . Additionally, the Company had state NOL carryforwards available of $ 1.6 million as of December 31, 2022 . The state NOLs may be used to offset future taxable income and will begin to expire in 2034 . The Company has generated UK NOLs of $ 2.2 million which carryforward indefinitely. At December 31, 2022, the Company had federal and state tax credit carry forwards of approximately $ 10.6 million and $ 0.5 million, respectively. The Company has not performed a formal research and development credit study with respect to these credits. The federal credits will begin to expire in 2034 , if unused, and the state credits carry forward indefinitely. The future utilization of the Company’s NOL and tax credit carryforwards 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, 2022. 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 has elected to record the inclusion related to the Global Intangible Low-Taxed Income (GILTI) in the period incurred. The estimated GILTI inclusion generated by the Company’s wholly-owned controlled foreign corporation in the United Kingdom for the year ended December 31, 2022 was $ 0.8 million. This amount is included in the income tax provision, however, has zero impact to the provision due to the full valuation allowance. The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections for future growth. Based on this evaluation, as of December 31, 2022, a full valuation allowance of $ 32.2 million has been recorded against the Company net deferred tax assets, as the Company has determined that none of the Company’s balance of deferred tax assets is more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to 149 Table of Contents subjective evidence, such as estimates of future taxable income during carryforward periods and the Company’s projections for growth. The following table summarizes the changes to unrecognized tax benefits (in thousands): Year Ended December 31, 2022 2021 Beginning balance of unrecognized tax benefits $ 2,999 $ 258 Additions based on tax positions related to the current year 4,095 2,741 Ending balance of unrecognized tax benefits $ 7,094 $ 2,999 The amount of the unrecognized tax benefits that would impact the effective tax rate, absent the valuation allowance, would be $ 7.1 million. Due to the full valuation allowance, the impact, however, is zero. At December 31, 2022 and 2021 , the Company has no t accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate that there will be a significant change in the amount of unrecognized tax benefits over the next 12 months. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company is subject to taxation in the United States and the UK. The Company’s federal and state returns since inception are subject to examination due to the carryover of net operating losses. The Company has not been, nor is it currently, under examination by any tax authorities. The UK tax returns from 2018 forward are subject to examination by the UK tax authorities. 11. Commitments and Contingencies Legal Proceedings The Company is currently not a party to any legal proceedings, nor is the Company aware of any threatened or pending litigation . However, from time-to-time in the future, the Company could be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of business, which may have a material adverse effect on the Company’s consolidated results of operations or financial position. 401(k) Plan The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. Matching contributions to the 401(k) plan are made for certain eligible employees to meet non-discrimination provisions of the plan. During the years ended December 31, 2022 and 2021 , the expense recorded by the Company was immaterial. 12. Subsequent Events Subsequent to December 31, 2022 through the date of this report, the Company has sold and issued approximately 400,000 shares of common stock under the ATM facility. 150 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.