Income taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income taxes

13. Income taxes

Historically, the Company had conducted its U.S. operations through a pass through entity that filed its income tax returns as a partnership for federal and state income tax purposes. As a result, the Company was not subject to U.S. federal or state income taxes as the related tax consequences were reported by its individual members. In July 2020, the Company changed its status from a limited liability company to a corporation, and accordingly, the Company became taxable at the entity level for U.S. federal and state tax purposes.

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):

	Year ended December 31, 2021			Year ended December 31, 2020
Tax computed at the federal statutory rate	$	(20,034	)	$	(7,529	)
Deferred impact of conversion to C Corporation		(2,131	)		(6,708	)
Partnership income not subject to tax		—			1,837
Nondeductible executive compensation		4,145			—
Stock-based compensation		(1,021	)		—
Research and development and orphan drug credits		(3,091	)		(807	)
Uncertain tax positions		757			197
Other, net		793			242
Valuation allowance		20,582			12,768
Income tax expense	$	—		$	—

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

	December 31, 2021			December 31, 2020
Deferred tax assets:
Net operating loss carryforwards	$	21,935		$	5,607
Guaranteed payments		—			1,702
Liability to licensor		4,159			—
Deferred revenue		—			4,159
Goodwill		3,449			—
Deferred rent		—			504
Lease liability		1,128			—
Accrued compensation		485			585
Research credit carryforwards		2,945			610
Stock-based compensation		697			438
Other		2			0
Gross deferred tax assets		34,800			13,605
Less valuation allowance		(33,351	)		(12,768	)
Total deferred tax assets		1,449			837
Deferred tax liabilities:
Fixed assets		(756	)		(837	)
Operating lease right-of-use asset		(693	)		—
Total deferred tax liabilities		(1,449	)		(837	)
Net deferred tax assets	$	—		$	—

A valuation allowance of approximately $33.4 million as of December 31, 2021 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 $20.6 million during 2021.

At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $104.5 million. The federal net operating losses can be carried forward indefinitely, subject to an 80% limitation against taxable income.

At December 31, 2021, the Company had federal and California research and development credit carryforwards of approximately $1.9 million and $1.2 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, 2021, the Company also had federal orphan drug credit carryforwards of approximately $1.0 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. As the Company operated as a partnership during the carryback period, net operating loss carrybacks will not be allowed. Due to the Company’s history of net operating losses, other provisions of the CARES Act are not expected to have a material impact on the Company’s financial statements.

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.

The following table summarizes the reconciliation of the unrecognized tax benefits activity during the year ended December 31, 2021 (in thousands):

Balance as of December 31, 2019	$	—
Gross increase – current-period tax positions		210
Balance as of December 31, 2020	$	210
Gross increase – current-period tax positions		801
Balance as of December 31, 2021	$	1,011

As of December 31, 2021, the Company had gross unrecognized tax benefits of approximately $1.0 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, 2021. 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 2018 and 2017, respectively, and forward. However, any adjustment made for the period prior to the conversion to C Corporation in July 2020 would be passed through to the Company's former members. Post-conversion to C Corporation, 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.