Income taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income taxes

11. Income taxes

A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the Company’s income tax expense is as follows (in thousands):

	Years Ended December 31,
	2022			2021
Tax computed at the federal statutory rate	$	(22,361	)	$	(20,034	)
State income taxes, net of federal tax benefit		(6	)		—
Deferred impact of conversion to C Corporation		—			(2,131	)
Nondeductible executive compensation		685			4,145
Stock-based compensation		1,132			(1,021	)
Research and development and orphan drug credits		(3,692	)		(3,091	)
Uncertain tax positions		910			757
Other, net		(23	)		793
Valuation allowance		23,355			20,582
Income tax expense	$	—		$	—

The Company’s net deferred tax assets (liabilities) are as follows (in thousands):

	Years Ended December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	17,430		$	21,935
Liability to licensor		4,159			4,159
Goodwill		3,193			3,449
Lease liability		836			1,128
Accrued compensation		659			485
Research credit carryforwards		5,760			2,945
Section 174 cost capitalization		14,523			—
Section 59(e) cost capitalization		9,450			—
Stock-based compensation		1,628			697
Other		3			2
Gross deferred tax assets		57,641			34,800
Less: valuation allowance		(56,706	)		(33,351	)
Total deferred tax assets		935			1,449
Deferred tax liabilities:
Fixed assets		(426	)		(756	)
Operating lease right-of-use asset		(509	)		(693	)
Total deferred tax liabilities		(935	)		(1,449	)
Net deferred tax assets	$	—		$	—

A valuation allowance of approximately $56.7 million as of December 31, 2022 has been established to offset the deferred tax assets as the Company has determined that it is not more likely than not that these assets will be realized. The valuation allowance increased by approximately $23.4 million during 2022.

At December 31, 2022, the Company had federal and state net operating loss carryforwards of approximately $83.0 million and $0.2 million, respectively. The federal and state net operating losses can be carried forward indefinitely, subject to an 80% limitation against taxable income.

At December 31, 2022, the Company had federal and California research and development credit carryforwards of approximately $3.7 million and $2.0 million, respectively. The federal credit carryforwards will begin to expire in 2040, unless previously utilized. The California credits will carry forward indefinitely.

At December 31, 2022, the Company also had federal orphan drug credit carryforwards of approximately $2.3 million. The orphan drug credit carryforwards will begin to expire in 2041, unless previously utilized.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an ownership change analysis pursuant to IRC Section 382. If ownership changes within the meaning of IRC Section 382 are identified as having occurred, the amount of remaining tax attribute carryforwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, the Company’s deferred tax assets associated with such tax attributes could be significantly reduced upon realization of an ownership change within the meaning of IRC Section 382.

Pursuant to the Paycheck Protection Program (the “PPP”) of the CARES Act, the Company received a PPP loan in the amount of $0.7 million. In 2021, the Company received forgiveness of the PPP loan. The loan forgiveness income is not considered taxable for Federal or state income tax purposes. In accordance with the Consolidated Appropriations Act, 2021 (CAA) enacted on December 27, 2020, certain qualified expenses used with the funds of the PPP Loan are fully deductible for Federal income tax purposes; however, California does not conform to this aspect of the CAA.

Under the FASB's accounting guidance related to income tax positions, among other things, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the guidance provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. The Company regularly evaluates the likelihood of recognizing the benefit for income tax positions taken in various federal and state filings by considering all relevant facts, circumstances, and information available.

A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):

	Years Ended December 31,
	2022		2021
Unrecognized tax benefits - beginning	$	1,011	$	210
Gross increases - tax positions in prior period		11		0
Gross increase – current-period tax positions		946		801
Unrecognized tax benefits - ending	$	1,968	$	1,011

As of December 31, 2022, the Company had gross unrecognized tax benefits of approximately $2.0 million, none of which would affect the Company’s effective tax rate due to the existence of the valuation allowance. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s consolidated balance sheet and has not recognized interest or penalties in the consolidated statements of net and comprehensive income for the year ended December 31, 2022. The Company does not anticipate a significant change to its liability for unrecognized tax benefits within the next twelve months.

The Company is subject to taxation in the United States and various state jurisdictions. The Company is subject to examination by tax authorities in those jurisdictions since 2019 and 2018, respectively, and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine periods where NOLs and research and development credits were generated and carried forward, and make adjustments to the amount of the NOL and research credits carryforward amount. The Company is not currently under examination by any jurisdiction.