Tempest Therapeutics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TEMPEST THERAPEUTICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 42 ) 90 Consolidated Balance Sheets 92 Consolidated Statements of Operations 93 Consolidated Statements of Stockholders’ Equity 94 Consolidated Statements of Cash Flows 95 Notes to Consolidated Financial Statements 96 89 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Tempest Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tempest Therapeutics, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders' equity 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 “financial statements”). In our opinion, the 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. 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 audits 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 90 Accrued research and development expenses Description of the Matter As described in Note 2 to the financial statements under the caption “Research and development expenses and accrued research and development”, the Company records the cost of research and development activities as they are incurred. The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. Service fees are accrued based on the Company’s estimates of the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers, the Company’s estimates of accrued expenses and on information available at each balance sheet date. As of December 31, 2022, the Company’s accrued clinical trial liability was $2.2 million. Auditing the Company’s accrual for research and development expenses was challenging because of the estimation involved in determining the accrual balance, which included information that was accumulated from multiple sources. In certain circumstances, the determination of the nature and level of services that have been received during the reporting period requires judgment because the timing and pattern of vendor invoicing did not correspond to the level of services provided and invoicing from clinical study sites and other vendors may not yet be available to management. How We Addressed the Matter in Our Audit To test the accrued research and development expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data used in the estimate, including, but not limited to, estimated project duration, research and manufacturing services incurred to date and terms of contractual arrangements. To assess the reasonableness of the data, we corroborated the progress of the clinical trials with Company research and development personnel and obtained third-party evidence supporting the activities performed to date. We recalculated the accrual based on executed contracts with the clinical research organizations, contract manufacturing organizations, clinical study sites and collaboration partners. We also tested subsequent invoicing received from third parties to assess the impact to the accrual at the balance sheet date and compared that to the Company’s estimates. /s/ Ernst & Young LLP We have served as the Company's auditor since 2021. Chicago, Illinois March 22, 2023 91 Tempest Therapeutics, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 31,230 $ 51,829 Insurance recovery of legal settlement 450 15,000 Prepaid expenses and other current assets 1,270 2,134 Total current assets 32,950 68,963 Property and equipment — net 1,060 1,113 Operating lease right-of-use assets 11,650 3,051 Other noncurrent assets 429 111 Total assets $ 46,089 $ 73,238 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,108 $ 991 Accrued legal settlement 450 15,000 Accrued expenses 2,961 1,589 Current operating lease liabilities 1,413 1,442 Accrued compensation 1,248 912 Interest payable 97 92 Total current liabilities 7,277 20,026 Loan payable (net of discount and issuance costs of $ 454 and $ 756 , respectively) 10,371 15,069 Operating lease liabilities, less current portion 10,330 2,026 Total liabilities 27,978 37,121 Commitments and contingencies (Note 6) Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 10,518,539 and 6,910,324 shares issued and outstanding at December 31, 2022 and 2021, respectively 11 7 Additional paid-in capital 153,872 136,173 Accumulated deficit ( 135,772 ) ( 100,063 ) Total stockholders’ equity 18,111 36,117 Total liabilities and stockholders’ equity $ 46,089 $ 73,238 See accompanying Notes to Consolidated Financial Statements 92 Tempest Therapeutics, Inc. Consolidated Statements of Operations (in thousands, except share and per share amounts) Years Ended December 31, 2022 2021 Operating expenses: Research and development $ 22,527 $ 17,166 General and administrative 12,113 9,820 Loss from operations ( 34,640 ) ( 26,986 ) Other income (expenses), net: Interest expense ( 1,618 ) ( 1,282 ) Interest income and other income (expenses), net 549 ( 34 ) Total other income (expenses), net ( 1,069 ) ( 1,316 ) Provision for income taxes — — Net loss $ ( 35,709 ) $ ( 28,302 ) Net loss per share of common stock and pre-funded warrants, basic and diluted $ ( 3.09 ) $ ( 7.47 ) Weighted-average shares of common stock and pre-funded warrants outstanding, basic and diluted 11,548,907 3,790,303 See accompanying Notes to Consolidated Financial Statements 93 Tempest Therapeutics, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional Paid-In Deficit Total Stockholders' Shares Amount Capital Accumulated Equity (Deficit) BALANCE — January 1, 2021 498,269 $ 1 $ 2,967 $ ( 71,761 ) $ ( 68,793 ) Exercise of stock options 33,127 — 139 — 139 Vesting of early exercised stock options 28,196 — 133 — 133 Conversion of preferred stock to common stock 3,692,912 4 86,703 — 86,707 Issuance of common stock for cash, net of issuance cost of $ 446 1,388,374 1 33,473 — 33,474 Share-based compensation — — 1,105 — 1,105 Reverse recapitalization transaction costs — — ( 6,420 ) — ( 6,420 ) Issuance of common stock to Millendo shareholders 1,269,446 1 18,000 — 18,001 Issuance of common stock warrants 73 — 73 Net loss — — — ( 28,302 ) ( 28,302 ) BALANCE — December 31, 2021 6,910,324 $ 7 $ 136,173 $ ( 100,063 ) $ 36,117 Exercise of stock options — — — — — Issuance of common stock for cash, net of issuance cost of $ 489 3,608,215 4 8,857 — 8,861 Share-based compensation — — 1,561 — 1,561 Issuance of pre-funded warrants, net of issuance cost $ 283 — — 7,281 — 7,281 Net loss — — — ( 35,709 ) ( 35,709 ) BALANCE — December 31, 2022 10,518,539 $ 11 $ 153,872 $ ( 135,772 ) $ 18,111 See accompanying Notes to Consolidated Financial Statements 94 Tempest Therapeutics, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 Operating activities: Net loss $ ( 35,709 ) $ ( 28,302 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 638 374 Stock-based compensation expense 1,561 1,105 Noncash lease expense 1,176 896 Noncash interest and other expense, net 394 583 Changes in operating assets and liabilities: Prepaid expenses and other assets 915 ( 179 ) Accounts payable 1 ( 209 ) Accrued expenses and other liabilities 1,709 723 Interest payable ( 256 ) 92 Operating lease liabilities ( 1,501 ) ( 1,040 ) Cash used in operating activities ( 31,072 ) ( 25,957 ) Investing activities: Purchase of property and equipment ( 562 ) ( 135 ) Repayment of related party note receivable — 38 Cash used in investing activities ( 562 ) ( 97 ) Financing activities: Proceeds from the issuance of common stock, net of issuance costs 8,861 33,425 Proceeds from issuance of pre-funded warrants, net of issuance costs 7,281 — Repayment of loan ( 4,739 ) — Borrowings on loan payable — 15,000 Payment of loan issuance costs — ( 95 ) Cash acquired in connection with reverse recapitalization — 17,045 Payment of reverse recapitalization transaction costs — ( 6,420 ) Proceeds from option exercises — 108 Cash provided by financing activities 11,403 59,063 Net increase in cash and cash equivalents ( 20,231 ) 33,009 Cash, cash equivalents and restricted cash at beginning of period 51,829 18,820 Cash, cash equivalents and restricted cash at end of period 31,598 51,829 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,539 $ 953 Cash paid for income taxes $ 18 Operating lease right-of-use assets recognized in exchange for lease liabilities $ 10,660 Non-cash operating activities: Lease modification $ 884 $ — Non-cash investing activities: Property and equipment in accounts payable $ 93 $ 78 Non-cash financing activities: Vesting of early exercise stock options $ — $ 136 Issuance of common stock for license agreement $ — $ 49 See accompanying Notes to Consolidated Financial Statements 95 Tempest Therapeutics, Inc. Notes to Consolidated Financial Statements As of and For the Years Ended December 31, 2022 and 2021 (In Thousands, Except Share and Per Share Amount) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Tempest Therapeutics, Inc. (“Tempest,” or the “Company”) is a clinical-stage oncology company advancing small molecules that combine both tumor-targeted and immune-mediated mechanisms with the potential to treat a wide range of tumors. The Company’s two novel clinical programs are TPST-1120 and TPST-1495, antagonists of PPARα and EP2/EP4, respectively. Both programs are advancing through clinical trials designed to study the agents as monotherapies and in combination with other approved agents. Tempest is also developing an orally available inhibitor of TREX-1, a target that controls activation of the cGAS/STING pathway. Tempest is headquartered in Brisbane, California. Merger with Millendo —On March 29, 2021, TempestTx, Inc. (“Private Tempest”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Millendo Therapeutics, Inc. (“Millendo”). Concurrent with the execution and delivery of the Merger Agreement, Private Tempest entered into funding agreements with certain investors named therein, pursuant to which the investors agreed to purchase, in the aggregate, $ 30.0 million of common stock of Private Tempest, convertible into securities of Millendo. On June 25, 2021, Private Tempest completed the merger with Millendo in accordance with the Merger Agreement. Prior to the effective time of the merger, Millendo effected a 1-for-15 reverse stock split, and right after the merger, Millendo changed its name to Tempest Therapeutics, Inc. Under the terms of the Merger Agreement, immediately prior to the effective time of the merger, each share of Private Tempest’s preferred stock was converted into a share of Private Tempest’s common stock. At closing of the merger, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock, resulting in approximately 6,635,345 shares of the Company’s common stock being issued and outstanding immediately following the effective time of the merger. The Company also assumed all of the outstanding and unexercised stock options and warrants to purchase shares of Private Tempest capital stock. The assumed options continue to be governed by the terms of the 2011 and 2017 Equity Incentive Plans (as discussed more in Note 9) under which the options were originally granted, with such options hence forth representing the right to purchase a number of shares of the Company’s common stock equal to 0.0322 multiplied by the number of shares of Private Tempest common stock previously represented by such options. The merger was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, Private Tempest was be deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the expectation that, immediately following the merger: (i) Private Tempest stockholders would own a substantial majority of the voting rights; (ii) Private Tempest would designate a substantial majority of the initial members of the board of directors of the combined company; (iii) Private Tempest’s executive management team would become the management of the combined company; and (iv) the combined company would be named Tempest Therapeutics, Inc. Accordingly, for accounting purposes, the merger was treated as the equivalent of Tempest issuing stock to acquire the net assets of Millendo. As a result of the merger, the net assets of Millendo were recorded at their acquisition-date fair value in the financial statements of Private Tempest and the reported operating results prior to the merger will be those of 96 Private Tempest. Historical per share figures of Private Tempest have been retroactively restated based on the exchange ratio of 0.0322 . Liquidity and Management Plans The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred operating losses since inception. As of December 31, 2022, we had cash and cash equivalents of $ 31.2 million. Our ability to fund continued development will require additional capital, and we intend to raise such capital through the issuance of additional debt or equity including in connection with potential merger opportunities, or through business development activities. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish these plans and secure sources of financing and ultimately attain profitable operations. If we are unable to obtain adequate capital, we could be forced to cease operations. On April 29, 2022, the Company completed a private investment in public equity (“PIPE”) financing from the sale of 3,149,912 shares of its common stock at a price per share of $ 2.36 and, and in lieu of shares of common stock, pre-funded warrants to purchase up to 3,206,020 shares of its common stock at a price per pre-funded warrant of $ 2.359 to EcoR1 Capital, LLC and Versant Venture Capital (the “PIPE Investors”). Net proceeds from the PIPE financings totaled approximately $ 14.5 million, after deducting offering expenses. The Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the PIPE Investors pursuant to which the Company filed a registration statement with the SEC registering the resale of the 3,149,912 shares common stock and the 3,206,020 shares of common stock underlying the pre-funded warrants issued in the PIPE financing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation —The accompanying Consolidated Financial Statements have been prepared in accordance with US generally accepted accounting principles ("GAAP") and necessarily include amounts based on estimates and assumptions by management. Use of Estimates —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to research and development accruals, recoverability of long-lived assets, right-of-use assets, lease obligations, stock-based compensation and income taxes uncertainties and valuation allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Segment Information —The Company operates and manages its business as one reportable and operating segment, which is the business of discovery and development of small molecule drugs to treat cancers. All assets and operations are in the U.S. The Company’s Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Risks and Uncertainties —The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, reliance on single-source vendors, availability of raw materials, patentability of the Company’s products and processes and clinical efficacy and safety of the Company’s products under development, compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance and reporting. The Company’s product 97 candidates are still in development and, to date, none of the Company’s product candidates have been approved for sale and, therefore, the Company has not generated any revenue from product sales. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company operates in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties. Concentration of Credit Risk —Financial instruments, which potentially subject the Company to concentration of risk, consist principally of cash and money market fund. All of the Company’s cash and money market fund are deposited in accounts with a major financial institution in excess of federally insured limits. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents to the extent recorded in the balance sheets. While the Company has not experienced any losses in such accounts, the recent failure of Silicon Valley Bank (SVB), at which the Company held cash and cash equivalents in multiple accounts, exposed the Company to significant credit risk prior to the completion by the Federal Deposit Insurance Corporation of the resolution of SVB in a manner that fully protected all depositors. The Company had subsequently transferred its accounts to one or more alternate depository institutions. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Cash and Cash Equivalents —The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisitions to be cash equivalents. As of December 31, 2022 and 2021 , the Company’s cash and cash equivalents consisted of bank deposits and money market funds. Leases —The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the lease term. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Property and Equipment —Property and equipment is recorded at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Upon disposal of an asset, the related cost and accumulated depreciation are removed from the asset accounts and any resulting gain or loss is included in the consolidated statements of operations. Repair and maintenance costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment. The estimated useful lives of the Company’s respective assets are as follows: Computer equipment and software 3 years Furniture and fixtures 7 years Laboratory equipment 5 years Leasehold improvements Shorter of the useful life of the asset or the life of the lease 98 Impairment of Long-Lived Assets —Long-lived assets are reviewed for impairment if events or circumstances indicate the carrying amount of these assets may not be recoverable. If this review indicates that these assets will not be recoverable, based on the forecasted undiscounted future operating cash flows expected to result from the use of long-lived assets and their eventual disposition, the Company’s carrying value of the long-lived assets is reduced to fair value based on a discounted future cash flow approach or quoted market values. Research and Development Expenses and Accrued Research and Development —Research and development expenses are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses including stock-based compensation, laboratory supplies, consulting costs, external contract research and development expenses and facility or lease expenses. In-licensing fees and other costs to acquire technologies that are utilized in research and development, and that are not expected to have alternative future use, are expensed when incurred. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed. The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers, the Company’s estimates of accrued expenses and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. The estimates are trued up to reflect the best information available at the time of the financial statement issuance. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company’s estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary. Patent Costs —Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain. These patent-related legal costs are reported as a component of general and administrative expenses. General and Administrative Expenses —General and administrative costs are expensed as incurred and include employee-related expenses including salaries, benefits, travel and stock-based compensation for the Company’s personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. Legal costs include general corporate legal fees and patent costs. Fair Value Measurements —Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The carrying amounts of the Company’s financial instruments approximate fair value due to their short-term maturities. Stock-Based Compensation Expense —The Company accounts for stock-based compensation by measuring and recognizing compensation expense for all share-based payments made to employees, directors and non-employees based on estimated grant-date fair values. The Company uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. The Company estimates the fair value of stock options to employees, directors and non-employees using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including expected volatility, expected dividend yield, expected term, risk-free rate of return, and the fair value of the underlying common stock on the date of grant. Due to the lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of representative companies have characteristics similar to the Company, including stage of product development and focus on the life science industry. The 99 Company uses the simplified method to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The Company accounts for forfeitures as they occur. Net Loss per Share Attributable to Common Stockholders —The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares. Income Taxes —The Company accounts for income taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In evaluating the ability to recover its deferred income tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period when such determination is made. As of December 31, 2022 and 2021, the Company has recorded a full valuation allowance on its deferred tax assets. Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. 100 3. MILLENDO MERGER As described in Note 1, Private Tempest merged with the Company on June 25, 2021. The merger was accounted for as a reverse recapitalization with Private Tempest as the accounting acquirer. The primary pre-combination assets of Millendo were cash, cash equivalents and restricted cash. Under reverse recapitalization accounting, the assets and liabilities of Millendo were recorded at their fair value which approximated book value due to the short-term nature of the instruments. No goodwill or intangible assets were recognized. Consequently, the Condensed Consolidated Financial Statements of Tempest reflect the operations of Millendo for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. As part of the reverse recapitalization, the Company obtained approximately $ 17.0 million of cash, cash equivalents and restricted cash. The Company also obtained prepaids and other assets of approximately $ 1.4 million and assumed payables and accruals of approximately $ 0.5 million. The Company also acquired the operating lease right-of-use asset of $ 2.1 million and the related operating lease liability of $ 2.1 million. All of the development programs and associated collaboration arrangements were terminated prior to the merger and were deemed to have no value at the transaction date and the Company has since wound down the legacy Millendo operations. 4. FAIR VALUE MEASUREMENTS The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands): As of December 31, 2022 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 31,230 $ — $ — $ 31,230 Total $ 31,230 $ — $ — $ 31,230 As of December 31, 2021 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 51,829 $ — $ — $ 51,829 Total $ 51,829 $ — $ — $ 51,829 5 . BALANCE SHEET ITEMS Prepaid expenses and other current asset consist of the following as of December 31, 2022 and 2021 (in thousands): 2022 2021 Prepaid expenses $ 703 $ 949 Prepaid research and development costs 304 632 Other current assets 263 553 Total $ 1,270 $ 2,134 101 Property and equipment, net, consists of the following as of December 31, 2022 and 2021 (in thousands): 2022 2021 Computer equipment and software $ 168 $ 156 Furniture and fixtures 310 193 Lab equipment 1,061 748 Leasehold improvements 882 840 Property and equipment 2,421 1,937 Less accumulated depreciation ( 1,361 ) ( 824 ) Property and equipment—net $ 1,060 $ 1,113 Depreciation expense for the years ended December 31, 2022 and 2021 were $ 638 and $ 374 , respectively. Accrued liabilities as of December 31, 2022 and 2021 consist of the following (in thousands): 2022 2021 Accrued other liabilities $ 756 $ 748 Accrued clinical trial liability 2,205 841 Total $ 2,961 $ 1,589 6. COMMITMENTS AND CONTINGENCIES Facilities Lease Agreements —In February 2019, the Company entered into a 5-year office lease agreement for a 9,780 square feet facility in South San Francisco, California. The original lease term expires on February 29, 2024 . In June 2022, the lease was amended to terminate early on January 31, 2023 . The amendment was not accounted for as a separate contract and the lease liability and the right-of-use asset were remeasured on the lease modification date. As a result of the merger with Millendo, the Company assumed Millendo’s noncancelable operating leases for office space which have remaining lease terms of approximately 1.2 years. In February 2019 and October 2018, Millendo entered into two noncancellable operating leases for office space in Ann Arbor, Michigan (“Ann Arbor Leases”), one that Millendo took possession of in April 2019 and the other that Millendo took possession of in July 2019, respectively. One of its leases in Ann Arbor, Michigan expires in June 2024 and the other expires in March 2024. In January 2022, the Company entered into a new 8-year office lease agreement for a 20,116 square feet facility in Brisbane, California ("Brisbane Lease"). The lease commenced in December 2022. As of December 31, 2022 and 2021, the balance of the operating lease right of use assets were $ 11,650 and $ 3,051 , respectively, and the related operating lease liability were $ 11,744 and $ 3,468 , respectively, as shown in the accompanying consolidated balance sheets. Rent expense was $ 1,445 and $ 1,039 for the years ended December 31, 2022 and 2021, respectively. 102 As of December 31, 2022, future minimum annual lease payments under the Company’s operating lease liabilities were as follows: Total Commitment Year Ending (in thousands) 2023 $ 2,613 2024 2,100 2025 1,861 2026 1,926 2027 1,994 2028 and beyond 6,410 Total minimum lease payments 16,904 Less: imputed interest ( 5,161 ) Present value of operating lease obligations 11,743 Less: current portion ( 1,413 ) Noncurrent operating lease obligations $ 10,330 Related to this Brisbane Lease agreement, the Company entered into a letter of credit with a bank to deposit $ 368 in a separate account that is restricted cash to serve as security rent deposit. This amount is included in other noncurrent assets in the accompanying Consolidated Balance Sheets as of December 31, 2022. Guarantees and Indemnifications —In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2022 and 2021, the Company does not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities. Legal Proceedings —Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. As a result of the merger with Millendo, the Company is party to various litigation matters given Millendo’s role as successor to OvaScience, Inc. (“OvaScience”). OvaScience merged with Millendo in 2018. Prior to the merger with Millendo, OvaScience was sued in three matters that are disclosed below. On November 9, 2016, a purported shareholder derivative action was filed in Massachusetts State court (Cima v. Dipp) against OvaScience and certain former officers and directors of OvaScience and OvaScience alleging breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets for purported actions related to OvaScience’s January 2015 follow-on public offering. As of September 12, 2022, the parties have reached an agreement in principle and have executed a term sheet in connection with a settlement. On September 13, 2022, the parties filed a joint motion to stay the case pending settlement. On September 15, 2022, the court issued a 90-day nisi order. On December 14, 2022, the court extended that order for 60 days to February 20, 2023. The parties have now reached an agreement on all of the material settlement terms and informed the court of this in a joint status update and request for extension of the order until March 22, 2023. On February 17, 2023, the court extended the order until March 22, 2023 and set a court appearance for March 23, 2023. The parties are currently working on the settlement documentation. Any final settlement is subject to Court approval. On March 24, 2017, a purported shareholder class action lawsuit was filed in Massachusetts Federal court (Dahhan v. OvaScience, Inc.) against OvaScience and certain former officers of OvaScience alleging violations of Sections 10(b) and 20(a) of the Exchange Act (the “Dahhan Action”). On March 4, 2022, the parties filed a motion to preliminarily approve a settlement of the action. The settlement amount of $ 15 million was funded entirely by insurance. All defendants expressly deny liability. On April 1, 2022, the Court preliminarily approved the settlement. On December 20, 2022, the Court entered final approval of the settlement and dismissed the Dahhan Action with prejudice. The settlement included a release of all claims against the defendants. The settlement included a release of all claims against the defendants thus no liability and $ 15 million related to this 103 matter was recorded in our Condensed Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021, respectively. On July 27, 2017, a purported shareholder derivative complaint was filed in Massachusetts Federal court (Chiu v. Dipp) against OvaScience and certain former officers and directors of OvaScience alleging breach of fiduciary duties, unjust enrichment and violations of Section 14(a) of the Exchange Act. related to OvaScience’s January 2015 follow-on public offering and other public statements concerning OvaScience’s AUGMENT treatment. Following the Court’s dismissal of an amended complaint, the parties agreed that plaintiffs could file a second amended complaint and that the case would be stayed pending the resolution of the Dahhan Action. In May 2018, the court entered an order staying this case pending the resolution of the Dahhan Action. As of September 12, 2022, the parties have reached an agreement in principle and have executed a term sheet in connection with the settlement. On February 14, 2023, the parties informed the court that, subject to court approval, they had reached an agreement to settle Chiu v. Dipp as well Cima v. Dipp. The parties requested a 90-day stay in order for the parties to present the settlement to the state court in Cima v. Dipp first. On February 16, 2023, the court granted the 90-day stay. The parties are currently working on the settlement documentation. Any final settlement is subject to Court approval. 7. LOAN PAYABLE On January 15, 2021, the Company entered into a loan agreement with Oxford Finance LLC (the "Lender")to borrow a term loan amount of $ 35,000 to be funded in three tranches. Tranche A of $ 15,000 was wired to the Company on January 15, 2021. Tranche B of $ 10,000 expired on March 31, 2022 . Tranche C of $ 10,000 is available at the Lender’s option. On December 23, 2022, the Company entered into a First Amendment to the loan agreement. The amendment modified the agreement as follows: (i) each of the Company and Millendo Therapeutics US, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Millendo”), were joined as co-borrowers under the Loan Agreement; (ii) the interest-only repayment period was extended through December 31, 2023 (which interest-only period may be further extended through June 30, 2024 under certain circumstances); and (iii) a security interest in all of the assets of the Company, TempestTx and Millendo, including any intellectual property, was granted to the Lender. In addition, the Lender permitted a one-time prepayment in the amount of $ 5.0 million, which the Company paid on December 23, 2022. Following the amendment to the loan agreement, the term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15 % which is an Index Rate plus 7.10 %. Index Rate is the greater of (i) 1-Month CME Term SOFR or (ii) 0.05 %. Monthly principal payments of $ 513 will begin on January 1, 2024. Related to this borrowing, the Company recorded loan discounts totaling $ 898 and paid $ 95 of debt issuance costs. These amounts would be amortized as additional interest expense over the life of the loan. As of December 31, 2022, the balance of the loan payable (net of debt issuance costs) was $ 10.4 million. The carrying value of the loan approximates fair value (Level 2). For the year ended December 31, 2022 and 2021, total interest expense was $ 1,618 and $ 1,282 , respectively. 8. STOCKHOLDERS' EQUITY Convertible Preferred Stock Prior to the merger with Millendo on June 25, 2021, Private Tempest had issued and outstanding convertible preferred stock. The authorized, issued and outstanding shares of the convertible preferred stock and liquidation preferences of Private Tempest as of December 31, 2020 and June 24, 2021 were as follows (in thousands, except share and per share amounts): 104 Series Shares Authorized Shares Issued and Outstanding Per Share Liquidation Preference Aggregate Liquidation Amount Proceeds Net of Issuance Cost Net Carrying Value Series A 17,000,000 17,000,000 $ 1.00 $ 17,000 $ 16,982 $ 16,982 Series B 25,186,738 25,186,738 1.00 25,187 24,943 12,235 Series B-1 93,749,993 72,499,993 0.80 58,000 57,489 57,489 Total 135,936,731 114,686,731 $ 100,187 $ 99,414 $ 86,706 Common Stock Upon completion of the merger on June 25, 2021, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock ( 3,692,912 common shares) and those shares of common stock issued with its pre-merger financing of $ 30.0 million ( 1,136,849 common shares). As of December 31, 2022 and December 31, 2021 , the Company was authorized to issue 100,000,000 shares of common stock and 5,000,000 shares of preferred stock, each with a par value of $ 0.001 per share. Of the common stock shares authorized, 10,518,539 and 6,910,324 were issued and outstanding at December 31, 2022 and December 31, 2021 , respectively. There were no shares subject to repurchase due to remaining vesting requirements. Common stockholders are entitled to dividends as declared by the Board of Directors, subject to rights of holders of all classes of stock outstanding having priority rights as to dividends. There was no preferred stock issued nor outstanding as of December 31, 2022 and December 31, 2021. Common stockholders are entitled to dividends as declared by the Board of Directors, subject to rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holders of each share of common stock are entitled to one vote. Except for effecting or validating certain specific actions intended to protect the preferred stockholders, the holders of common stock vote together with preferred stockholders and have the right to elect one member of the Company’s Board of Directors. ATM Program On July 23, 2021, the Company entered into a sales agreement with Jefferies LLC, pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $ 100,000,000 of its common stock through Jefferies LLC (the "ATM Program"). Our ability to sell securities under the ATM program will be limited until we are no longer subject to the SEC’s “baby shelf” limitations. Pre-Funded Warrants In April 2022, the Company completed a PIPE financing, which included the issuance of pre-funded warrants to purchase up to 3,206,020 shares of its common stock at a price per pre-funded warrant of $ 2.359 to the PIPE Investors. The pre-funded warrants provide that the holder will not have the right to exercise any portion of its warrants if such holder, together with its affiliates, would beneficially own in excess of 9.99 % of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that the holder may increase or decrease the Beneficial Ownership Limitation by giving 61 days ’ notice to the Company, but not to any percentage in excess of 19.99 %. 105 9. STOCK-BASED COMPENSATION Equity Plans In 2011, Private Tempest adopted the 2011 Equity Incentive Plan (the “2011 Plan), and in 2017, Private Tempest adopted the 2017 Equity Incentive Plan (the “2017 Plan”), and together with the 2011 Plan, “the Tempest Equity Plans”. Upon adoption of the 2017 Plan, the 2011 Plan was terminated. The Board of Millendo adopted the 2019 Equity Incentive Plan (the “2019 Plan”) on April 29, 2019, subject to approval by the Company’s stockholders, and became effective with such stockholder approval on June 11, 2019. As a result of the merger, the Tempest Equity Plans were assumed by the Company. The number of shares of the Company's common stock reserved for issuance under the 2019 Plan will automatically increase on January 1st of each year, for a period of 10 years, from January 1, 2020 continuing through January 1, 2029, by 4 % of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board of Directors. On June 17, 2022, the Company’s stockholders approved the Amended and Restated 2019 Equity Incentive Plan (the “A&R 2019 Plan”), which amends and restates the 2019 Plan and will be a successor to, and replacement of, the 2019 Plan. The A&R 2019 Plan had been adopted by the Company’s Board of Directors and one of the material changes was to increase the number of shares available for issuance by 1,132,252 . The A&R 2019 Plan still includes the annual evergreen provision of automatically increasing on January 1st of each year the number of option shares available for issuance by 4 % of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board of Directors. On January 1, 2023, the common stock reserved for issuance was increased by 420,742 shares. Both the 2017 Plan and the A&R 2019 Plan allow the Company to grant stock awards to employees, directors and consultants of the Company, including incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock awards. The Company measures employee and non-employee stock-based awards at grant date fair value and records compensation expense on a straight-line basis over the vesting period of the award. As of December 31, 2022 , a total of 1,039,010 shares are available for future grant under the 2017 Plan and A&R 2019 Plan. Employee Stock Ownership Plan The Board of Millendo adopted the 2019 Employee Stock Purchase Plan on April 29, 2019, which became effective upon such stockholder approval on June 11, 2019. On June 17, 2022, the Company’s stockholders approved the Amended and Restated 2019 Employee Stock Purchase Plan (the “2019 ESPP”). The 2019 ESPP enables employees to purchase shares of the Company's common stock through offerings of rights to purchase the Company's common stock to all eligible employees. The 2019 ESPP provides that the number of shares of common stock reserved for issuance under the 2019 ESPP will automatically increase on January 1, 2023 and continuing through (and including) January 1, 2029, by the lesser of 1.5 % of the total number of shares of Common Stock outstanding on December 31st of the preceding calendar year, (ii) 500,000 shares of Common Stock, or (iii) such lesser number of shares of Common Stock as determined by the Board of Directors (which may be zero). On January 1, 2023, the common stock reserved for issuance was increased by 157,778 shares. As of December 31, 2022 , 137,097 shares of common stock remained available for future issuance under the 2019 ESPP. As of December 31, 2022 , 6,120 shares of common stock had been issued under the 2019 ESPP during the 12 months ended December 31, 2022. Stock Options 106 Options to purchase the Company’s common stock may be granted at a price not less than the fair market value in the case of both NSOs and ISOs, except for an options holder who owns more than 10% of the voting power of all classes of stock of the Company, in which case the exercise price shall be no less than 110 % of the fair market value per share on the grant date. Stock options granted under the Plans generally vest over four years and expire no later than ten ( 10 ) years from the date of grant. Vested options can be exercised at any time. Prior to the merger, the grant date fair market value of the shares of common stock underlying stock options has historically been determined by the Company’s Board of Directors. Up until the merger, there had been no public market for the Company’s common stock, and therefore the Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included valuations performed by an independent third-party, important developments in the Company’s operations, sales of convertible preferred stock, actual operating results, financial performance, the conditions in the life sciences industry, the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company’s common stock. The following shows the stock option activities for the years ended December 31, 2022 and 2021: Total Options Outstanding Weighted-Average Exercise Price Balance—December 31, 2020 452,165 $ 5.35 Assumed in reverse recapitalization 177,591 179.79 Granted 307,529 16.78 Exercised ( 33,127 ) 4.20 Cancelled and forfeited ( 113,521 ) 115.72 Balance—December 31, 2021 790,637 $ 32.82 Granted 909,527 3.34 Exercised — — Cancelled and forfeited ( 147,123 ) 128.79 Balance—December 31, 2022 1,553,041 6.66 The following table summarizes information about stock options outstanding at December 31, 2022: Shares Weighted Average Remaining Contractual Life (In Years) Weighted Average Exercise Price Aggregate Intrinsic Value Options outstanding 1,553,041 8.57 $ 6.66 $ — Vested and expected to vest 1,553,041 8.57 $ 6.66 $ — Exercisable 473,471 7.54 $ 8.65 $ — During the years ended December 31, 2022 and 2021 , the Company granted employees and non-employees stock options to purchase 909,527 and 307,529 shares of common stock with a weighted-average grant date fair value of $ 2.82 and $ 16.78 per share, respectively. As of December 31, 2022 and 2021, total unrecognized compensation costs related to unvested employee stock options were $ 4,012 and $ 3,341 , respectively. These costs are expected to be recognized over a weighted-average period of approximately 2.6 years and 1.4 years, respectively. The Company estimated the fair value of stock options using the Black-Scholes option pricing valuation model. The fair value of employee stock options is being amortized on the straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following assumptions for the years ended December 31, 2022 and 2021: 107 2022 2021 Expected term (in years) 5.5 - 6.1 5.7 - 6.1 Expected volatility 109 % - 112 % 67 % - 69 % Risk-free interest rate 1.5 % - 3.9 % 0.9 % - 1.3 % Dividends — % — % Expected Term —The expected term of options granted represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected term of the Company’s employee stock options has been determined utilizing the simplified method for awards that qualify as plain-vanilla options. Expected Volatility —The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. Risk-Free Interest Rate —The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. Dividends —The Company has not paid any cash dividends on common stock since inception and does not anticipate paying any dividends in the foreseeable future. Consequently, an expected dividend yield of zero was used. Stock-Based Compensation Expense The following table summarizes the components of stock-based compensation expense recognized in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021: 2022 2021 Research and development $ 517 $ 303 General and administrative 1,044 802 Total $ 1,561 $ 1,105 10. INCOME TAXES There was no provision for income taxes for the years ended December 31, 2022 and 2021, because the Company has incurred losses since inception. At December 31, 2022 and 2021 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, 2022 and 2021, 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: 2022 2021 U.S. federal provision (benefit) At statutory rate $ ( 7,497 ) $ ( 5,906 ) State taxes ( 2,733 ) ( 3,887 ) Valuation allowance 8,581 9,154 Tax credits ( 1,173 ) ( 767 ) Stock-based compensation 2,606 1,366 Permanent differences 216 40 Total $ — $ — 108 Significant components of the Company’s deferred tax assets at December 31, 2022 and 2022 are shown below. 2022 2021 Deferred tax assets: Net operating losses $ 131,346 $ 125,111 Research and development tax credits 18,122 16,670 Amortization 916 1,094 Lease liability 3,504 1,027 Stock based compensation 576 3,784 Other 378 254 Capitalized R&D 4,138 — Fixed assets 10 — Total gross deferred tax assets 158,990 147,940 Less: valuation allowance ( 155,514 ) ( 146,933 ) Total deferred tax assets 3,476 1,007 Deferred tax liability: Right-of-use assets ( 3,476 ) ( 903 ) Fixed assets — ( 104 ) Total gross deferred tax liabilities ( 3,476 ) ( 1,007 ) Net deferred tax assets $ — $ — The deferred tax assets and valuation allowance increased by $ 8.6 million from December 31, 2021 to December 31, 2022 due primarily to the generation of net operating losses and research and development credits. As of December 31, 2022, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $ 466.0 million and $ 434.4 million, respectively. 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. The federal and state net operating loss carryforwards begin to expire in 2031 and 2022, respectively, if not utilized. Federal net operating losses of $ 244.8 million are not subject to expiration. As of December 31, 2022 , the Company has federal and state research and development carryforwards of approximately $ 11.7 million and $ 3.6 million, respectively. The Company also has $ 7.4 million of Orphan Drug Credit. 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 federal and state credits begin to expire in 2031 and 2029, respectively, if not utilized; $ 2.5 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, 2022 . 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, 2022 and 2021: 2022 2021 Beginning balance $ 4,293 $ 1,280 Gross increase - tax positions in prior periods — $ 2,767 Gross decrease - tax positions in prior periods — — Gross increase - tax position in current period 357 $ 246 Settlements — — Lapses in statutes of limitations — — Ending balance $ 4,650 $ 4,293 109 As of December 31, 2022 and 2021, 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, 2022 and 2021, respectively, and has not recognized penalties and interest in the accompanying statements of operations for the years ended December 31, 2022 and 2021, 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. 11. RETIREMENT PLAN The Company participates in a qualified 401(k) Plan sponsored by its professional service organization. The retirement plan is a defined contribution plan covering eligible employees. Participants may contribute a portion of their annual compensation limited to a maximum annual amount set by the Internal Revenue Service. During the year ended December 31, 2022 , the Company contributed $ 126 to the 401(k) Plan. There was no contribution from the Company for the year ended December 31, 2021. 12. NET LOSS PER SHARE The following table sets forth the computation of the Company’s basic and diluted net loss per share for the years ended December 31, 2022 and 2021 (in thousands, except share and per share amounts): 2022 2021 Numerator: Net loss $ ( 35,709 ) $ ( 28,302 ) Denominator: Weighted-average common shares outstanding 11,548,907 3,799,392 Less: Weighted-average unvested restricted shares and shares subject to repurchase — ( 9,089 ) Weighted-average shares used in computing basic and diluted net loss per share 11,548,907 3,790,303 Net loss per share attributable to common stockholders—basic and diluted $ ( 3.09 ) $ ( 7.47 ) As of December 31, 2022 and 2021 , the Company’s potentially dilutive securities included unvested stock warrants and stock options, which have been excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would be anti-dilutive. The issuance of pre-funded warrants have been included in the computation of basic and diluted net loss per share attributable to common stockholders. Based on the amounts outstanding as of December 31, 2022 and 2021, the Company excluded the following potential common shares from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect: 2022 2021 Options to purchase common stock 1,553,041 790,637 Common stock warrants 6,036 6,036 1,559,077 796,673 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.