Income Tax

12 Months Ended

Dec. 31, 2021

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, 2021 and 2020, 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, 2021 and 2020, the Company had no such accruals.

The components of income tax expense (benefit) are as follows:

	2021		2020
Current Expense:
Federal	$	—	$	—
State		—		—
Foreign		—		—
		—		—
Deferred Expense:
Federal	$	(145,974)	$	—
State		—		—
Foreign		—		—
Total	$	(145,974)	$	—

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

	2021		2020
Federal income tax expense at statutory rate:	$	(7,465,000)	$	(5,540,000)
Increase (reduction) in income tax resulting from:
State Income Taxes		556,000		833,000
Foreign Rate Differential		(16,000)		5,000
Nondeductible Expenses		1,000		210,000
Research & Development Credit		(836,000)		(682,000)
Stock Based Compensation		164,000		113,000
Excess Executive Compensation		259,000		248,000
Payout of Contingent Consideration		—		421,000
Goodwill Impairment		305,000		—
Reserve for Loss Carryforwards Limited by Sec. 382		8,000		15,270,000
Other		(32,974)		(41,000)
Increase in Valuation Allowance		6,911,000		(10,837,000)
	$	(145,974)	$	—

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, 2021 and December 31, 2020:

	2021		2020
Deferred tax assets:
Net Operating Losses	$	17,830,889	$	13,012,193
R&D Credits		2,538,168		1,528,044
Stock Compensation		2,344,902		1,931,784
Contingent Consideration		767,763		668,994
Deferred Revenue		8,039		—
Unrealized Gains/Losses		210,300		—
Deferred tax assets		23,700,061		17,141,015
Deferred tax liabilities:
Intangible Assets		(803,937)		(1,347,399)
Property, plant and equipment, primarily due to differences in depreciation		(83,122)		(69,882)
Lease Liability		(78,035)		(99,761)
Other Accrued Expenses		(83,931)		(29,781)
Deferred tax liabilities		(1,049,025)		(1,546,823)
Valuation allowance		(22,866,973)		(15,956,103)
Net deferred tax (liabilities)	$	(215,937)	$	(361,911)

At December 31, 2021 and December 31, 2020, 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 company completed a 382 analysis to determine any limitations on the annual usage of their NOL carryforwards (discussed in further detail below). As a result of this reserve analysis, the valuation allowance was decreased from $32,484,566 to $15,956,103 at December 31, 2020. The allowance increased to $22,866,973 at December 31, 2021. 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, 2021, the Company has federal net operating loss carryforwards of approximately $145,217,000, including $3,027,284 acquired from Pelican Therapeutics. However, due to Section 382 limitations (discussed in further detail below), only $84,582,770 of the NOLs are available to offset future taxable income.  The federal net operating loss carryforwards begin to expire in 2029. The Company has various state net operating loss carryforwards totaling approximately $126,400,000 including $2,464,819 from Pelican Therapeutics.  However, due to Section 382 limitations (discussed in further detail below), only approximately $60,188,000 of the NOLs are available to offset future state taxable income. State net operating losses begin to expire in 2024. On November 15, 2021, the North Carolina General Assembly passed Senate Bill 105 eliminating the current 2.5% corporate income tax by phased lowering of the rate from 2025 – 2030. An additional reserve has been set up for North Carolina NOLs that are not expected to be used by 2030. The Company has various foreign net operating loss carryforwards of approximately $139,196. 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, 2021 and 2020, 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, 2021 and 2020, 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 2020.

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 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.

During the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31, 2021, the Company completed an assessment of the available NOL and tax credit carryforwards under Sections 382 and 383, respectively, of the Code. The Company determined that it underwent multiple ownership changes throughout its history as defined under Section 382, including most recently in 2020. As a result of the identified ownership changes, the portion of NOL and tax credit carryforwards attributable to the pre-ownership change periods are subject to a substantial annual limitation under Sections 382 and 383 of the Code. The Company has adjusted its previously reported NOL and tax credit carryforwards to address the impact of the 382 ownership changes. This resulted in a reduction of available federal and state NOLs of $58.2 million and $64.1 million, respectively. The write down of the NOLs reduced the net operating losses line as of December 31, 2020 within gross deferred tax assets as previously disclosed by $13.5 million, with a corresponding decrease in the valuation allowance. The Company also reduced its tax credit carryforwards as of December 31, 2020 within gross deferred tax assets by $3 million with a corresponding decrease in the valuation allowance.

Since the limitation affected the prior period, the Company has determined that its December 31, 2020 tax footnote presentation overstated the gross deferred tax asset and corresponding valuation allowance by $16.5 million. However, there was no net impact to the net deferred tax asset and tax expense as the decrease in the net operating loss and tax credit carryforwards was offset completely by a corresponding adjustment to the Company’s overall valuation allowance. For comparative purposes, the Company’s prior year tax footnote has been revised to reflect the adjustment to the net operating losses, tax credits and valuation allowance. The revision had no effect on the previously reported balance sheets, statements of operations and comprehensive loss, cash flows and stockholders’ equity.