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INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 17 — INCOME TAXES

 

The following table presents domestic and foreign components of consolidated loss before income taxes for the periods presented:

 

   December 31, 2022   December 31, 2021 
Domestic  $(15,954,750)  $(17,891,710)
Foreign   (5,344,967)   — 
Loss before provision for income taxes  $(21,299,717)  $(17,891,710)

 

 

A reconciliation of the statutory income tax rates and the Company’s effective tax rate is as follows:

 

   December 31, 2022   December 31, 2021 
Statutory federal income tax rate   21.00%   21.00%
State taxes, net of federal tax benefit   5.46%   6.63%
Non-deductible expenses   -1.36%   -1.19%
NOL expiration   -12.96%   -2.71%
Tax credit   2.42%   0.86%
Goodwill impairment   -4.50%   0.00%
Foreign rate differential   0.50%   0.00%
Change in FV of warrant liability   0.89%   5.54%
True-up   1.47%   -2.72%
Change in valuation allowance   -11.68%   -27.44%
Income taxes provision (benefit)   1.24%   -0.03%

 

Income tax expense for the year ended December 31, 2022 and 2021 consisted of the following:

 

   December 31, 2022   December 31, 2021 
   For the Years Ended 
   December 31, 2022   December 31, 2021 
Current        
US Federal  $—   $— 
US State   7,000    5,000 
Foreign   —    — 
Total current provision   7,000    5,000 
Deferred          
US Federal   (236,000)   (1,268,000)
US State   (2,252,000)   (3,641,000)
Foreign   (272,000)   — 
Total deferred benefit   (2,760,000)   (4,909,000)
Change in valuation allowance   2,488,000    4,909,000 
Total provision (benefit) for income taxes  $(265,000)  $5,000 

 

The components of deferred tax assets and liabilities are as follows:

 

   December 31, 2022   December 31, 2021 
Deferred tax assets:          
Net operating loss  $33,540,000   $33,362,000 
Research and development credits   7,857,000    6,185,000 
Accrued expenses   1,020,000    757,000 
Patent   —    262,000 
Stock compensation   3,069,000    2,747,000 
Research and development expenses   1,196,000    — 
Fixed assets   280,000    282,000 
Total deferred income tax assets   46,962,000    43,595,000 
           
Deferred tax liabilities:          
Intangible assets   (1,324,000)   (34,000)
Right-of-use asset   (382,000)   (436,000)
Total deferred income tax liabilities   (1,706,000)   (470,000)
           
Net deferred income tax assets   45,256,000    43,125,000 
Valuation allowance   (45,614,000)   (43,125,000)
Deferred tax asset, net of allowance  $(358,000)  $— 

 

Based on the available objective evidence, including the Company’s history of cumulative losses, management believes it is likely that the Company’s U.S. federal and state net deferred tax assets will not be realizable. Accordingly, the Company provided for a full valuation allowance against its U.S. federal and state net deferred tax assets at December 31, 2022 and December 31, 2021.

 

 

Due to the full valuation allowance already in place on the Company’s U.S. federal and state net deferred tax assets, the Company does not anticipate significant changes in the Company’s effective tax rate. However, there is no valuation allowance recorded against the Company’s foreign net operating loss deferred tax assets, as the Company’s foreign IPR&D deferred tax liabilities and foreign net operating loss deferred tax assets are both indefinite-lived and thus they may be netted to arrive at a net foreign deferred tax liability. This results in $272,000 of foreign deferred tax benefit recorded to the income statement in 2022.

 

The Tax Cuts and Jobs Act resulted in significant changes to the treatment of research or experimental (“R&E”) expenditures under Section 174. For tax years beginning after December 31, 2021, taxpayers are required to capitalize and amortize all R&E expenditures that are paid or incurred in connection with their trade or business which represent costs in the experimental or laboratory sense. Specifically, costs for U.S. based R&E activities must be amortized over five years and costs for foreign R&E activities must be amortized over 15 years; both using a midyear convention. The Company has incorporated the impact of this new tax legislation into its 2022 consolidated financial statements, noting that the impact on the Company’s consolidated financial statements was immaterial.

 

At December 31, 2022, the Company has U.S. federal and state net operating loss carryforwards of approximately $119,254,000 and $110,227,000, respectively, which are available to offset future taxable income. U.S. federal and state net operating loss carryovers began to expire in 2020. As a result of the May 2020 reverse recapitalization, an ownership change has occurred. The Company has not completed an Internal Revenue Code Section 382 analysis. As a result, there could be substantial limitations on the Company’s ability to utilize its pre-ownership change net operating loss and tax credit carryforwards. These substantial limitations may result in both a permanent loss of certain tax benefits related to net operating loss carryforwards and federal research and development credits, and an annual utilization limitation. At December 31, 2022, the Company has foreign net operating loss carryforwards of approximately $953,000, which are available to offset future taxable income. Foreign net operating loss carryovers are indefinite lived and do not expire.

 

The Company also has research and development credit carryforwards for federal and state tax purposes of approximately $5,484,000 and $2,373,000, respectively. The research and development credit carryforwards began to expire in 2020 for federal tax purposes and have an indefinite life for state tax purposes.

 

U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation.

 

The Company files income tax returns in the U.S. federal jurisdiction and in various states. The Company’s U.S. federal income tax returns remain subject to examination by the Internal Revenue Service. The Company’s California income tax returns remain subject to examination by the California Franchise Tax Board. Due to net operating losses, research and development credits and other tax credit carryforwards that may be utilized in future years, all U.S. federal and state tax years are open to examination.

 

Generally accepted accounting principles clarify the accounting for uncertainty in income taxes recognized in the Company’s financial statements and prescribe thresholds for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provide guidance on de-recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted these provisions effective April 1, 2009.

 

The Company did not have any unrecognized tax benefits as of December 31, 2022 and December 31, 2021 and does not expect this to change significantly over the next 12 months. In accordance with generally accepted accounting principles, the Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2022, the Company has not accrued any interest or penalties related to uncertain tax positions.