Note 15 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

15. Income Taxes

The Company had no income tax for the years ended December 31, 2022 and 2021.

The effective tax rate of our provision for income taxes differs from the federal statutory rate for the periods presented as follows:

	December 31,
	2022			2021
Statutory rate		21.0	%		21.0	%
State taxes		5.6	%		2.1	%
Share-based compensation & other nondeductible expenses		-2.7	%		-1.0	%
Write-off of in-process R&D		0.0	%		-12.9	%
Research credits		1.4	%		0.8	%
Other		-0.1	%		0.0	%
Change in valuation allowance		-25.2	%		-10.0	%
Total		0.0	%		0.0	%

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis 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. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets will not be realizable, and therefore, a valuation allowance has been established. The valuation allowance for deferred tax assets was approximately $28.0 million and $18.1 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, the Company has U.S. federal and state net operating loss carryforwards (“NOLs”) of $59.1 million and $42.5 million, respectively. As of December 31, 2022, the Company has federal and state research and development credit carryforwards (“R&D credits”) of $1.4 million and $2.4 million, respectively. For income tax purposes, federal NOLs will not expire since they were generated after 2017 and federal R&D credits will begin expiring in 2039. For income tax purposes, state NOLs and state R&D credits will begin to expire in 2040 and 2031, respectively.

Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (the “IRS”) and 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 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not yet conducted a study to determine if any such limitation exists.

The Tax Cuts and Jobs Act of 2017 (“TCJA”) amended IRC Section 174 to require capitalization of all research and developmental (R&D) costs incurred in tax years beginning after December 31, 2021. These costs are required to be amortized with a half-year convention over five years if the R&D activities are performed in the U.S., or over 15 years if the activities were performed outside the U.S. The Company capitalized approximately $28.6 million and amortized $1.8 million of R&D expenses incurred for the year ended December 31, 2022. 

As of December 31, 2022, the Company had no uncertain tax positions, and as such, no related interest or penalties have been recorded in the statement of operations and comprehensive loss. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. All tax years of the Company from inception are open to examination by federal tax and state tax authorities. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 2022 will remain subject to examination until the respective tax year is closed. The Company has not been informed by any tax authorities for any jurisdiction that any of its tax years is under examination as of December 31, 2022.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2022			2021
Deferred tax assets	(000's)
Federal net operating loss carryforwards	$	12,405		$	10,847
State net operating loss carryforwards		2,687			2,228
Research and development credits		3,273			2,716
Section 174 Capitalization		7,294			—
Share-based compensation		701			706
Lease liabilities		801			1,131
Capitalized licensing fees		1,591			1,637
Other		70			22
Subtotal		28,822			19,287
Less valuation allowance		(28,013	)		(18,113	)
Deferred tax assets, net of valuation allowance		809			1,174
Deferred tax liabilities
Right-of-use assets		(809	)		(1,116	)
Other		—			(58	)
Net deferred tax assets	$	—		$	—