Annual report pursuant to Section 13 and 15(d)

Income Tax

v3.21.1
Income Tax
12 Months Ended
Dec. 31, 2020
Income Tax  
Income Tax

12.        Income Tax

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of December 31, 2020 and 2019, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with these items. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of operations. As of December 31, 2020 and 2019, the Company had no such accruals.

 

The components of income tax expense (benefit) attributable to continuing operations are as follows:

 

 

 

 

 

 

 

 

 

    

2020

    

2019

Current Expense:

 

 

 

 

 

 

Federal

 

$

 

$

State

 

 

 —

 

 

 —

Foreign

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

Deferred Expense:

 

 

  

 

 

  

Federal

 

$

 —

 

$

45,178

State

 

 

 —

 

 

 —

Foreign

 

 

 —

 

 

 —

Total

 

$

 —

 

$

45,178

 

The differences between the company’s income tax expense attributable to continuing operations and the expense computed at the 21% United States statutory income tax rate were as follows:

 

 

 

 

 

 

 

 

 

    

2020

    

2019

Federal income tax expense at statutory rate:

 

$

(5,540,000)

 

$

(4,271,000)

Increase (reduction) in income tax resulting from:

 

 

  

 

 

  

State Income Taxes

 

 

(433,000)

 

 

(581,000)

Foreign Rate Differential

 

 

5,000

 

 

(9,000)

Nondeductible Expenses

 

 

210,000

 

 

15,000

Research & Development Credit

 

 

(682,000)

 

 

(772,000)

Stock Based Compensation

 

 

113,000

 

 

132,000

Excess Executive Compensation

 

 

248,000

 

 

295,000

Payout of Contingent Consideration

 

 

421,000

 

 

 —

Goodwill Impairment

 

 

 —

 

 

155,000

Reserve for Loss Carryforwards Limited by Sec. 382

 

 

8,000

 

 

8,000

Other

 

 

(41,000)

 

 

74,178

Increase in Valuation Allowance

 

 

5,691,000

 

 

4,999,000

 

 

$

 —

 

$

45,178

 

The tax effects of temporary differences and operating loss carryforwards that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows at December 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

    

2020

    

2019

Deferred tax assets:

 

 

 

 

 

 

Net Operating Losses

 

$

26,496,651

 

$

22,278,013

R&D Credits

 

 

4,572,049

 

 

3,829,550

Stock Compensation

 

 

1,931,784

 

 

878,094

Contingent Consideration

 

 

668,994

 

 

854,129

Lease Liability

 

 

(99,761)

 

 

9,950

Other Accrued Expenses

 

 

 —

 

 

20,797

 

 

 

 

 

 

 

Deferred tax assets

 

 

33,569,717

 

 

27,870,533

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

  

 

 

  

Intangible Assets

 

 

(1,347,399)

 

 

(1,347,399)

Property, plant and equipment, primarily due to differences in depreciation

 

 

(69,882)

 

 

(91,764)

Other Accrued Expenses

 

 

(29,781)

 

 

 —

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

(1,447,062)

 

 

(1,439,163)

 

 

 

 

 

 

 

Valuation allowance

 

 

(32,484,566)

 

 

(26,793,281)

 

 

 

 

 

 

 

Net deferred tax (liabilities)

 

$

(361,911)

 

$

(361,911)

 

At December 31, 2020 and December 31, 2019, the Company evaluated all significant available positive and negative evidence, including the existence of losses in recent years and management’s forecast of future taxable income, and, as a result, determined it was more likely than not that federal and state deferred tax assets, including benefits related to net operating loss carryforwards, would not be realized. The valuation allowance was increased from $26,793,281 at December 31, 2019 to $32,484,566 at December 31, 2020. Net Operating Losses created in years beginning after 2017 now only offset 80% of Taxable Income but no longer have a 20 year expiration. As such, NOL’s created after 2017 can be used to offset indefinite lived liabilities up to 80%.

 

At December 31, 2020, the Company has federal net operating loss carryforwards of approximately $118,799,856, including $3,027,284 acquired from Pelican Therapeutics, which are available to offset future taxable income. However, due to potential Section 382 limitations (discussed in further detail below) a reserve has been set up for the Pelican Therapeutics NOL of $(2,416,776). The federal net operating loss carryforwards begin to expire in 2029. The Company has various state net operating loss carryforwards totaling approximately $103,538,617 including $2,464,819 from Pelican Therapeutics, which are available to offset future state taxable income. State net operating losses begin to expire in 2024. The Company has various foreign net operating loss carryforwards of approximately $127,610. The foreign net operating loss carryforwards are carried forward indefinitely. Because the Company has incurred cumulative net operating losses since inception, all tax years remain open to examination by U.S. federal, state, and foreign income tax authorities.

In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of December 31, 2020 and 2019, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with these items. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying statements of income. As of December 31, 2020 and 2019, the Company had no such accruals

The Company files income tax returns in the United States, various state and foreign jurisdictions. The Company is subject to examination by taxing authorities for the tax years ended December 31, 2009 through 2019.

Potential 382 Limitation

The Company’s ability to utilize its net operating loss (NOL) and research and development (R&D) credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.

Due to the recent ownership changes, the Company is in the process of performing a study to determine whether a limitation of net operating losses and other attributes under IRC Sections 382 and 383 has occurred. The amount of NOL’s subject to this study are approximately $65 million. Since the study is still in-process, the deferred tax assets attributes subject to limitation are currently included in the consolidated financial statements, offset in full by a valuation allowance.  When the section 382 study is complete, the limited deferred tax assets and related valuation allowances will be written off.