INCOME TAXES

12 Months Ended

Sep. 30, 2020

INCOME TAXES

7. INCOME TAXES

7.

INCOME TAXES

At September 30, 2020 and 2019, the Company had net deferred tax assets of $35.5 million and $28.8 million, respectively. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax assets. In assessing the realization of deferred tax assets, management considered whether it was more likely than not that some, or all, of the deferred tax asset will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. Management has considered the history of the Company’s operating losses and believes that the realization of the benefit of the deferred tax assets cannot be reasonably assured. Pursuant to Section 382 of the Internal Revenue Code, or IRC, annual use of the Company’s net operating loss (NOL) carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company determined that because of various stock issuances used to finance its operations, an ownership change as defined in the provisions of Section 382 of the IRC occurred on February 5, 2018. Such ownership change resulted in annual limitations on the utilization of tax attributes, including NOL carryforwards and tax credits. The Company estimates that $188.9 million of its NOL carryforwards were effectively eliminated under Section 382 for federal income tax purposes. A portion of the remaining NOL carryforwards limited by Section 382 will become available each year. No limitations on NOL carryforwards relating to change in ownership were imposed during the year ended September 30, 2020. The Company’s Section 382 estimated analysis was completed through September 30, 2020. If additional changes in ownership occur after year end, additional NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

The Company had federal NOL carryforwards of approximately $51.5 million and $36.7 million at September 30, 2020 and 2019, respectively. Approximately $19.2 million of the NOL carryforwards begin to expire during the year ended September 30, 2021 and become fully expired by 2039 and approximately $32.3 million of NOL carryforwards, which were generated post Tax Cuts and Jobs Act, have an indefinite live. The NOL carryforwards begin to expire during the year ended September 30, 2021 and become fully expired by the end of the fiscal year ended 2039. In addition, the Company has a general business credit as a result of the credit for increasing research activities (“R&D credit”) of approximately $1.2 million at September 30, 2020 and 2019. The R&D credit begins to expire during the year ended September 30, 2021 and becomes fully expired during the fiscal year ended 2029.

Significant components of the Company’s deferred tax assets as of September 30, 2020 and 2019 are listed below:

	2020			2019
NOL carryforwards	$	13,407,000		$	9,698,000
Lease liabilities		3,631,000			-
R&D credit		1,221,000			1,221,000
Stock-based compensation		5,297,000			3,165,000
Capitalized R&D		15,853,000			14,777,000
Vacation and other		125,000			544,000
Total deferred tax assets		39,534,000			29,405,000
Right of use assets		(3,911,000	)		-
Fixed assets and intangibles		(169,000	)		(586,000	)
Total deferred tax liability		(4,080,000	)		(586,000	)
Net deferred tax asset		35,454,000			28,819,000
Valuation allowance		(35,454,000	)		(28,819,000	)
Ending Balance	$	-		$	-

The Company has no federal or state current or deferred tax expense or benefit. The Company’s effective tax rate differs from the applicable federal statutory tax rate. The reconciliation of these rates is as follows at for the years ended September 30:

	2020			2019
Federal Rate		21.00	%		21.00	%
Federal rate change		(1.40	)		(2.8	)
State tax rate, net of federal benefit		5.15			5.31
Other adjustments		(3.24	)		(4.77	)
Permanent differences		0.42			(0.57	)
Change in valuation allowance		(21.93	)		(18.17	)
Effective tax rate		0.00	%		0.00	%

The Company applies the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes,” which requires financial statement benefits to be recognized for positions taken for tax return purposes when it is more likely than not that the position will be sustained. The Company has elected to reflect any tax penalties or interest resulting from tax assessments on uncertain tax positions as a component of tax expense. The Company has generated federal net operating losses in tax years ending September 30, 1998 through 2019. These years remain open to examination by the major domestic taxing jurisdictions to which the Company is subject.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The Company does not expect the enactment of the CARES Act to directly impact its financial position, results of operations or cash flows.