Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We provide for income taxes under ASC 740. Under ASC 740, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Our loss before income taxes was $32.7 million and $20.3 million for the years ended December 31, 2021 and 2020, respectively, and was generated entirely in the United States and Canada.

The income tax benefit for the year ended December 31, 2021 was $0 and income tax expense for the year ended December 31, 2020 was $30,584. For 2021 and 2020, taxes paid are related to our Canadian entity.

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes.

The significant components of our deferred tax assets are comprised of the following:

	As of December 31,
	2021		2020
Federal NOL	$	13,292,524	$	8,385,931
State NOL	3,127,854		800,008
Research and development credits	1,246,653		503,406
Lease liability	89,106		172,674
Stock compensation & other	1,911,401		1,108,314
Deferred tax asset valuation allowance	(19,048,156)		(10,239,037)
Total deferred tax asset	619,382		731,296
Deferred tax liability (In-Process R&D)	(957,000)		(957,000)
Right-of-use asset	(71,404)		(183,318)
Total deferred tax liability	(1,028,404)		(1,140,318)
Net deferred tax liability	$	(409,022)	$	(409,022)

We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on our history of operating losses since inception, we have concluded that it is more likely than not that the benefit of our deferred tax assets will not be realized. Accordingly, we have provided a full valuation allowance for deferred tax assets as of December 31, 2021 and 2020, including those related to Canada. We have recorded a net deferred tax liability of $409,022 related to in-process research and development as a result of the acquisition of Ciclofilin. It is our position that the acquired in-process research and development is an indefinite-lived intangible asset and is not available as a source of income to support the realization of deferred tax assets.

The valuation allowance increased by $8.8 million and $2.5 million for the years ended December 31, 2021 and 2020, respectively, due primarily to the generation of net operating losses during these periods.

A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:

	Year Ended December 31,
	2021		2020
U.S. statutory income tax rate	21.0	%	21.0	%
State income taxes, net of federal benefit	8.0	%	8.6	%
Research and development credits	1.7	%	2.1	%
Warrant liability and contingent consideration	(1.5)		(0.2)	%
Other	(1.1)	%	(1.7)	%
Valuation allowance	(28.1)	%	(29.9)	%
Effective tax rate	—	%	(0.1)	%

As of December 31, 2021 and 2020, we had U.S. federal and state net operating loss carryforwards of $101.1 million and $49.6 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in December 2022. We also had federal and state research and development tax credit carryforwards of approximately $1.2 million as of December 31, 2021, which will begin to expire in December 2023.

Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The utilization of these NOLs is subject to limitations based on past and future changes in our ownership pursuant to Section 382. We completed a Section 382 study of transactions in our stock through December 31, 2021 and concluded that we have experienced ownership changes since inception that we believe under Section 382 and 383 of the Code will result in limitations on our ability to use certain pre-ownership change NOLs and credits (see Note 2). In addition, we may experience subsequent ownership changes as a result of future equity offerings or other changes in the ownership of our stock, some of which are beyond our control. As a result, the amount of the NOLs and tax credit carryforwards presented in our consolidated financial statements could be limited. Similar provisions of state tax law may also apply to limit the use of accumulated state tax attributes.

We file income tax returns in the United States, Canada and various state jurisdictions. Our federal income tax returns for the years 2016 and forward and state income returns for the years 2015 and forward remain subject to examination by the Internal Revenue Service (“IRS”) and state authorities. Our tax returns in Canada are also subject to examination.

We had an unrecognized tax position of $0, a corresponding accrual for penalties and interest in the amount of $0, as a component of income tax expense, accrued through December 31, 2021. There are no amounts included in the unrecognized tax benefit at December 31, 2021 that will impact the effective rate if recognized. During the year ended December 31, 2021, the unrecognized tax position along with the corresponding interest and penalties were paid and the accrual has been reduced to $0 at December 31, 2021 and we no longer have an unrecognized tax position.

We have approximately $0.9 million of undistributed earnings in Canada, which we continue to reinvest indefinitely, and therefore no withholding taxes related to its repatriation has been recorded.