Income taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income taxes

. 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,
	2023			2022
Tax computed at the federal statutory rate	$	(25,927	)	$	(22,361	)
State income taxes, net of federal tax benefit		(8	)		(6	)
Nondeductible executive compensation		99			685
Stock-based compensation		1,326			1,132
Research and development and orphan drug credits		(6,205	)		(3,692	)
Uncertain tax positions		1,551			910
Other, net		228			(23	)
Valuation allowance		28,936			23,355
Income tax expense	$	—		$	—

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

	Years Ended December 31,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	25,034		$	17,430
Liability to licensor		4,159			4,159
Goodwill		2,938			3,193
Lease liability		517			836
Accrued compensation		746			659
Research credit carryforwards		10,379			5,760
Section 174 cost capitalization		31,220			14,523
Section 59(e) cost capitalization		8,400			9,450
Stock-based compensation		2,790			1,628
Other		4			3
Gross deferred tax assets		86,187			57,641
Less: valuation allowance		(85,642	)		(56,706	)
Total deferred tax assets		545			935
Deferred tax liabilities:
Fixed assets		(231	)		(426	)
Operating lease right-of-use asset		(314	)		(509	)
Total deferred tax liabilities		(545	)		(935	)
Net deferred tax assets	$	—		$	—

A valuation allowance of approximately $85.6 million as of December 31, 2023 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 $28.9 million during 2023.

At December 31, 2023, the Company had federal and state net operating loss carryforwards of approximately $119.2 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. The state net operating losses will begin to expire in 2042, unless previously utilized.

At December 31, 2023, the Company had federal and California research and development credit carryforwards of approximately $7.8 million and $2.7 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, 2023, the Company also had federal orphan drug credit carryforwards of approximately $3.9 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.

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 further clarification 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,
	2023		2022
Unrecognized tax benefits - beginning	$	1,968	$	1,011
Gross increases - tax positions in prior period		161		11
Gross increase – current-period tax positions		1,473		946
Unrecognized tax benefits - ending	$	3,602	$	1,968

As of December 31, 2023, the Company had gross unrecognized tax benefits of approximately $3.6 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 balance sheet and has not recognized interest or penalties in the statements of operations and comprehensive income for the year ended December 31, 2023. 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 2020 and 2019, 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.