Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes 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, 2020. Tax years beginning in 2017 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. There was no interest or penalties related to uncertain tax positions arising in the years ended December 31, 2020 and 2019.

The income tax provision from continuing operations consisted of the following for the years ending December 31, 2020 and 2019:


	December 31,
	2020		2019
Current:
Federal	$	(2,158,004)	$	209,001
State	(439,372)		54,572
Total Current	(2,597,376)		263,573

Deferred:
Federal	(146,655)		24,458
State	(48,930)		(7,715)
Total Deferred	(195,585)		16,743
Net income tax (benefit) expense	$	(2,792,961)	$	280,316

The net deferred tax liabilities consisted of the following for the years ending December 31, 2020 and 2019:


	December 31,
	2020		2019
Deferred tax assets (liabilities):
Net operating losses	$	14,935,387	$	7,596,955
Accrued compensation	893,098		321,748
Investment in Aytu	—		577,490
Tax credits	2,748,480		1,070,738
Stock-based compensation	2,848,797		1,872,442
Installment sale	461,593		441,305
Other reserves	542,852		399,885
Prepaid expenses	(246,771)		(120,863)
Right-of-use asset	(224,271)		(167,943)
Lease liability	358,025		296,259
Basis difference in tangible and intangible assets, net	1,935,389		1,968,008
Total deferred tax assets, net	24,252,579		14,256,024
Less valuation allowance	(24,342,973)		(14,342,005)
Net deferred taxes	$	(90,394)	$	(85,981)

As of December 31, 2020, the Company has roughly $61.1 million of gross NOLs for federal and state tax purposes that will begin to expire in 2031, including $55.4 million of gross NOLs for federal and state tax purposes that carry forward indefinitely. As of December 31, 2020, the Company has research and experimental tax credits of $2.7 million that will begin to expire in 2038.

The income tax benefit (expense) for the years ended December 31, 2020 and 2019 differed from the amounts computed by applying the U.S. federal income tax rate of 21% as follows:


	December 31,
	2020		2019
Federal statutory rate	21.00	%	21.00	%
Stock compensation	(0.47)		(0.47)
State taxes	0.60		(0.13)
Research and development credit	2.53		5.13
Acquired in-process research and development	(8.09)		—
Fair value adjustment to contingent consideration	—		1.65
NOL carryback due to CARES Act	3.26		—
Other	(0.16)		(1.86)
Valuation allowance	(14.46)		(27.07)
Effective income tax rate	4.21	%	(1.75)	%

The valuation allowance recorded by the Company as of December 31, 2020 and December 31, 2019 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 2017 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, 2020 and December 31, 2019.

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 through June 2020 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. Based on the Company having undergone multiple ownership changes throughout their history these NOLs will free up at varying rates each year. Subsequent to the changes in ownership previously listed, the 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. This could limit the amount of NOLs and research and development credits that the Company can utilize annually to offset future taxable income or tax liabilities. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership after June 30, 2020 and therefore no determination has been made whether the entire NOL carryforward balance are subject to any additional Internal Revenue Code Section 382 limitation. To the extent there is a limitation, which could be significant, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance. Subsequent ownership changes may further affect the limitation in future years. All of the Company’s tax years are currently open to examination by each tax jurisdiction in which the Company is subject to taxation.

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, which provided a number of tax provisions. In particular, the CARES Act included temporary changes regarding the utilization and five year carry back of losses generated in 2018, 2019 and 2020, temporary changes regarding interest deductions, technical corrections from prior tax legislation related to qualified improvement property, and various other measures. The ability for the Company to carry back a portion of its 2018 loss to the 2017 tax year resulted in a refund claim of $2.6 million, which was reflected as a benefit in the current period. The Company has received $0.5 million of this amount and expects to receive the remainder in 2021.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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