Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

12. Income Taxes

There was an income tax benefit for the year ended December 31, 2022 of $1.4 million. For the year ended December 31, 2021 there was no income tax expense due to the Company’s domestic net losses. The Company’s tax expense differs from the “expected” tax expense for the years ended December 31, 2022, and 2021.  For 2022, the “expected” tax expense is computed by applying the Federal corporate statutory tax rate of 21% and a net, after Federal benefit state tax rate of 6.47%  (state blended rate was 8.19%) to loss before taxes. In addition, the tax benefit impact from foreign operations represents the impact of VCN’s statutory foreign tax rate on its operations adjusted for the difference and between US and Spanish tax rates. For 2021, the “expected” tax expense is computed by applying the Federal corporate statutory tax rate of 21% and a net, after Federal benefit state tax rate of 6.46% (state blended rate was 8.18%) to loss before taxes.  These results are as follows (in thousands):

	2022		2021
Computed “expected” tax-benefit - Federal	$	(4,033)	$	(3,045)
Computed “expected” tax-benefit - State		(677)		(931)
Non-deductible stock-based compensation		41		32
State Tax Rate Adjustment		(1)		932
Foreign Tax Rate Adjustment		(212)		—
Forfeited NQSO Trueup		422		—
Transaction Costs		41
Fair Market Value Adjustment - Contingent Consideration		439
Other Permanent Differences		54
Change in valuation allowance		2,901		3,012
		(1,425)	$	—

12. Income Taxes (continued)

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):

	Year Ended December 31,
	2022		2021
Deferred Tax Assets:
Federal & State NOL Carryforward	$	22,235	$	16,884
Accrued Compensation		29		27
Stock Issued For Services		1,053		1,504
Stock Issued for Acquisition of Program		1,456		1,462
Stock Issued for License Agreement		1,362		1,363
Stock Issued For Milestone Payment		—		236
Amortizable License Fee		4		4
Capitalized Research & Development costs		1,592		—
Total Gross DTA		27,731		21,480
Less: Val. Allowance		(24,562)		(21,480)
Total Deferred Tax Assets		3,169		—
Deferred Tax Liabilities:
IPR&D		(4,787)
Total Gross DTL		(4,787)		—
Net Deferred Tax Assets	$	(1,618)	$	—

On March 10, 2022, the Company acquired VCN, a Spanish Company in a tax-free stock acquisition. Due to this acquisition, VCN is a wholly owned subsidiary of the company.  As a result of the acquisition, a deferred tax liability was established with purchase accounting related to acquired In Process Research and Development.  A deferred tax asset was also established with purchase accounting related to VCN’s unlimited life net operating loss carryover.

At December 31, 2022, the Company has a gross Federal net operating loss carry-forward of approximately $65.8 million available to offset future United States taxable income. The Company’s pre-2018 net operating losses expire on various dates through 2037. In addition, it was determined that the utilization of gross Federal net operating losses of approximately $221.5 million was limited by $155.6. million as a result change of control ownership changes that occurred under Section 382 of the Internal Revenue Code.  State NOL’s are also limited by Section 382 of the Internal Revenue Code and were limited accordingly.

In 2020, the Company completed an Internal Revenue Code Section 382 analysis of its historical net operating loss carry-forward amount. As a result, the prior year net operating loss carry-forward was limited by $155.6 million.  The decrease in the prior year net operating loss is attributable to control ownership changes which were determined for the years 2013 and 2018 which caused the reduction in the value of the historical net operating loss carry-forward amounts. Updated section 382 analysis were performed in 2021 and 2022 to identify if any additional ownership shifts occurred in these years.  It was determined that an ownership shift occurred on January 20, 2021.  The result of the updated Section 382 analysis produced an IRC 382 limit due to the 2021 ownership shift.  There was no ownership shift determined for 2022.  All previously limited net operating losses remain available for use in future periods.

The Company’s pre-2018 net operating losses expire on various dates through 2037 while the net operating loss carry-forward originating in the 2018 year and later carryforward indefinitely and are subject to additional limitations based on taxable income.

12. Income Taxes (continued)

At December 31, 2022, the Company has a gross Foreign net operating loss carryforward of approximately $11.8 million related to its newly acquired Spanish subsidiary, VCN.  The net operating loss does not expire and is available to offset future Spanish taxable income.

The Company’s valuation allowance at December 31, 2022 was approximately $24.6 million. The net change in valuation allowance during the year ended December 31, 2022, was an increase of approximately $3.1 million primarily due to increases in gross federal and state deferred tax assets in 2022.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2022 and 2021, management has established a full valuation allowance against its net deferred tax assets in all US tax jurisdictions. The Company has not established a valuation allowance in its Spanish tax jurisdictions since it is in a net deferred tax liability position in Spain."

Undistributed earnings of our foreign subsidiary, VCN, are considered to be permanently reinvested and, accordingly, no deferred U.S. income taxes have been provided thereon. Upon distribution of any earnings in the form of dividends or otherwise, those earnings would be subject to U.S. income tax.  At the present time, VCN does not have any earnings and thus it is not necessary to estimate the amount of U.S. income taxes that might be payable if these earnings were repatriated.  

We have incurred net operating losses since inception, and we do not have any significant unrecognized tax benefits.