Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

The Company accounts for income taxes in accordance with ASC 740 (Topic 740, Income Taxes). ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in our financial statement or tax returns. ASC Topic 740 also clarifies the accounting for uncertainty in income taxes recognized in the financial statement. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded in our financial statement for the year ended December 31, 2019. Tax years beginning in 2016 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

ASC Topic 740 provides guidance on the recognition of interest and penalties related to income taxes. It is the Company's policy to treat interest and penalties, to the extent they arise, as a component of income taxes. The Company accrued interest and penalties as components of income expense for tax liability generated for the year ended December 31, 2017. There was no interest or penalties related to income taxes arising in the years ended December 31, 2019 and 2018.

The income tax provision from continuing operations consisted of the following for the years ending December 31, 2019 and 2018:



	December 31,
	2019			2018
Current:
Federal	$	209,001		$	(53,281	)
State	54,572			20,560
Total Current	263,573			(32,721		)

Deferred:
Federal	24,458			(52,235		)
State	(7,715		)	35,490
Total Deferred	16,743			(16,745		)
Net income tax expense (benefit)	$	280,316		$	(49,466	)

The net deferred tax liabilities consisted of the following for the years ending December 31, 2019 and 2018:



	December 31,
	2019			2018
Deferred tax assets (liabilities):
Net operating losses	$	7,596,955		$	4,421,423
Accrued compensation	321,748			465,430
Investment in Aytu	577,490			—
Tax credits	1,070,738			252,095
Stock-based compensation	1,872,442			1,922,736
Installment sale	441,305			508,291
Other reserves	399,885			277,633
Prepaid expenses	(120,863		)	(160,474		)
Right-of-use asset	(167,943		)	—
Lease liability	296,259			—
Basis difference in tangible and intangible assets, net	1,968,008			2,968,764
Total deferred tax assets, net	14,256,024			10,655,898
Less valuation allowance	(14,342,005		)	(10,725,136		)
Net deferred taxes	$	(85,981	)	$	(69,238	)

As of December 31, 2019, the Company has roughly $32.5 million of gross NOLs for federal and state tax purposes that will begin to expire in 2031, including $27 million of gross NOLs for federal and state tax purposes that carry forward indefinitely. As of December 31, 2019, the Company has research and experimental tax credits of $1.1 million that will begin to expire in 2038.

The income tax benefit for the years ended December 31, 2019 and 2018 differed from the amounts computed by applying the U.S. federal income tax rate of 21% as follows:



	December 31,
	2019		2018
Federal statutory rate	21.00	%	21.00	%
Stock compensation	(0.47	)%	(0.10	)%
State taxes	(0.13	)%	4.98	%
Research and development credit	5.13	%	0.70	%
Acquired in-process research and development	—	%	(11.17	)%
Fair value adjustment to contingent consideration	1.65	%	—	%
Other	(1.86	)%	(0.74	)%
Valuation allowance	(27.07	)%	(14.53	)%
Effective income tax rate	(1.75	)%	0.14	%

The valuation allowance recorded by the Company as of December 31, 2019 and December 31, 2018 resulted from the uncertainties of the future utilization of deferred tax assets mainly resulting from net operating loss carry forwards for federal and state income tax purposes as well as the federal research and experimental and orphan drug tax credits. In assessing the realization of deferred tax assets, management considers the reversal of deferred tax liabilities, as well as whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences are expected to reverse. The Company has established deferred tax liabilities for indefinite lived intangible assets consisting of goodwill that are not amortized for financial reporting purposes but are tax deductible and therefore amortized over 15 years for tax purposes. The Company has concluded that the resulting deferred tax liability will also have an indefinite life unless there is an impairment of the related assets (for financial reporting purposes), or the disposal of the business to which the assets relate. Losses generated in years after 2018 will also have an indefinite life and will be available to offset 80 percent of any Federal tax liability and will be available to offset many of the State deferred tax liabilities subject to utilization limits. A portion of existing deferred tax assets will reverse in the future, potentially generating net operating losses that will also be available to offset a portion of the indefinite lived deferred tax liability. Based on the consideration of these facts, the Company concluded it is more likely than not that a significant portion of its remaining gross deferred tax assets less the reversal of deferred tax liabilities will not be realized in the future, accordingly, a full valuation allowance continues to be recorded against the Company’s deferred tax asset as of December 31, 2019 and December 31, 2018.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately as such time when it is determined that the “more likely than not” criteria is satisfied.

Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company has undergone an ownership change study and has determined that a "change in ownership" as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, did occur in February 2012, July 2014, and April 2017. Accordingly, approximately $52.2 million of the Company's NOL carryforwards are limited. Based on the Company having undergone multiple ownership changes throughout their history these NOLs will free up at varying rates each year.

On December 22, 2017, H.R. 1 (also, known as the Tax Cuts and Jobs Act (the “Act”)) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. federal corporate tax rate from 35% to 21%. As a result, the Company concluded that the most significant impact on its 2017 consolidated financial statements is the reduction of approximately $2,200,000 in deferred tax assets and liabilities related to net operating losses and other assets. Such reduction is largely offset by changes to the Company’s valuation allowance. The Company is reported the impacts of the Act provisionally in the 2017 financial statements based upon reasonable estimates. The analysis of the tax effects of the Act has now been complete and there were not adjustments in 2018.

In addition, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Act ("SAB 118") which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, ongoing guidance and accounting interpretation was expected over the past year, and significant data and analysis was required to finalize amounts recorded pursuant to the Tax Act, the Company considered the accounting for the deferred tax remeasurements and other items to be incomplete at December 31, 2017 due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company completed its analysis within the measurement period in accordance with SAB 118 and there were no additional adjustments necessary.