Note 11 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(11) INCOME TAXES:

If all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax asset of approximately $23,167,000 based upon expected income tax rates. Under ASC 740, deferred tax assets must be reduced by a valuation allowance if it is likely that all or a portion of it will not be realized.  At December 31, 2022, we have determined it is more likely than not that we will not realize our temporary deductible differences and net operating loss carryforwards, and have provided a 100% valuation allowance on our net deferred tax asset.

Positive evidence we evaluated in the order of significance and weighting in our evaluation includes the amount of net operating loss carryforward utilized against current income tax liabilities in four of the prior ten years, and the length of time the net operating loss carryforwards are available before they expire.  Negative evidence we considered in the order of significance and weighting in our evaluation include our recent net losses, our plans for continued clinical trial and product development expenses, the timing of expiration of the net operating loss carryforwards prior to being utilized, unpredictability of future sales and profitability, competition from others, and new government regulations.  We determined greatest weight should be given to our plans for continued clinical trial and product development expenses, trend of increasing expenses, and net operating losses in our evaluation.  We re-measure our valuation allowance each quarter based on changes in our current and expected future sales and margins, and changes in the other factors of both positive and negative evidence.

At December 31, 2022, we have unused federal and state net operating loss carryforwards totaling approximately $42,395,000 that may be applied against future taxable income.  

If not used, the net operating loss carryforwards will expire as follows:

Year Ending December 31,	Amount
2024	$	66,000
2028		7,000
2030		160,000
2031		73,000
2032		48,000
2034		727,000
2035		1,969,000
2036		2,867,000
2037		2,481,000
Indefinite		33,997,000
Total	$	42,395,000

A change in ownership pursuant to Section 382 of the Internal Revenue Code occurred during 2014. As a result, net operating losses in existence as of the date of the ownership change are subject to an annual Section 382 limitation.

The Company has expenses that qualify for the Orphan Drug Credit. The Orphan Drug Credit may be used to offset any current tax liabilities. Unused credits may be carried forward for 20 years. If the credit has not been used by the end of the 20 year carryforward period, it can be deducted as an expense for federal income tax purposes. The cumulative unused credit carryforward was $10,354,000 at December 31, 2022.

For 2022 we did not recognize a benefit or provision for income taxes. The net deferred tax asset before the valuation allowance increased $5,464,000 from 2021 to 2022, which is primarily the result of an additional net operating loss for 2022. We increased our valuation allowance to offset this increase in our deferred tax asset. For 2021 we did not recognize a benefit or provision for income taxes.  The net deferred tax asset before the valuation allowance increased $5,500,000 from 2020 to 2021, which is primarily the result of an additional net operating loss for 2021. We increased our valuation allowance to offset this increase in our deferred tax asset.

(11) INCOME TAXES: (CONTINUED)

Significant components of our deferred Federal income taxes were as follows:

	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	10,761,000		$	9,570,000
Tax credits		10,354,000			8,104,000
Impairment allowances		19,000			13,000
Stock-based compensation		45,000			-
Other		105,000			99,000
Accrued bonuses		245,000			-
Research and development expenses, net		1,642,000			-
Less valuation allowance		(23,167,000	)		(17,703,000	)
Deferred tax asset, net of valuation		4,000			83,000
Deferred tax liabilities:
Property and equipment		(4,000	)		(8,000	)
Stock-based compensation		-			(75,000	)
Deferred tax liabilities		(4,000	)		(83,000	)
Net tax assets	$	-		$	-

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Effective January 1, 2021, the Florida corporate state income tax rate was reduced from 4.458% to 3.535%. Effective January 1, 2022, the Florida corporate state income tax rate increased to 5.5%. The impact of these rate changes in 2021 was a reduction in the Company’s deferred tax asset and the corresponding valuation allowance of approximately $399,000. There was no impact on 2022.

The differences between the effective income tax rate reflected in the benefit (provision) for income taxes and the amounts, which would be determined by applying federal statutory income tax rate of 21% at December 31, 2022 and 2021, is summarized as follows: 

	2022			2021
Tax benefit (expense) at Federal statutory rate		21	%		21	%
Effect of State taxes		3	%		3	%
Effect of tax rate change		-	%		3	%
Tax credits		15	%		16	%
Nondeductible expenses		(3	)%		(3	)%
Valuation allowance – deferred tax assets		(36	)%		(39	)%
Total tax benefit (provision)	$	-		$	-

The Company files income tax returns in the U.S. Federal jurisdiction, and three states. The Company is no longer subject to U.S. Federal or state income tax examinations by tax authorities for years before 2019.

The Company has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes, and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company. When applicable, interest and penalties will be reflected as a component of income tax expense.