Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.1
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of loss before the income tax provision consist of the following:
  Year Ended
December 31,
  2022 2021
United States $ (18,801,570) $ (8,446,034)
Foreign (673,291) (74,048)
Pre-tax loss and comprehensive loss from operations $ (19,474,861) $ (8,520,082)
The components of the income tax expense consisted of the following:
Year Ended
December 31,
2022 2021
Current income tax expense
State 6,741  2,100 
Total current income tax expense 6,741  2,100 
The Company is subject to taxation in the United States, various states, Australia, and Canada. The Company’s tax years for 2019 (federal), 2018 (States), 2021 (Australia) and 2018 (Canada) and forward are subject to examination by the United States, state, Australian, and Canadian tax authorities. However, to the extent allowed by law, the taxing authorities may have the right to examine periods where NOLs and credits were generated and carried forward and make adjustments up to the amount of the NOL and credit carryforwards.  The Company is not currently under examination by any jurisdiction.
At December 31, 2022, the Company had federal and state NOLs aggregating $42,309,149 and $46,926,115, respectively. If not used, $13,129,037 of Federal NOLs and $46,792,947 of state NOLs will begin to expire in 2033. $29,180,112 of federal NOLs and $133,168 of state NOLs will carry forward indefinitely subject to an 80% limitation against taxable income. At December 31, 2022, the Company had Australia NOLs aggregating $131,687 which do not expire and $77,737,683 of Canadian NOLS which begin to expire in 2023.
At December 31, 2022, the Company had Canadian capital loss carryforwards of approximately $33,301,494 which may be carried forward indefinitely.
At December 31, 2022, the Company had federal and California research credit carryforwards of approximately $454,417 and $132,221, respectively. The federal research credit carry forwards will begin to expire in 2040, unless previously utilized. The California research credits will carry forward indefinitely. The Company’s NOLs and research credit carryforwards are subject to a reserve. Additionally, the Company had Canadian SR&ED credits as of December 31, 2022 of $919,820 which may be carried forward indefinitely.
Utilization of the domestic NOL and research credits could be subject to a substantial annual limitation due to ownership change limitations that may have occurred, or that could occur in the future, as required by Section 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOLs and credits that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
Upon the occurrence of an ownership change under Section 382 as outlined above, utilization of the NOLs and credits are subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOLs and credits before utilization. While the Company has not performed a Section 382 study, multiple ownership changes may have already occurred as the Company raised capital through the issuance of stock. However, due to the existence of the valuation allowance for deferred tax assets, any potential change in ownership will not impact the Company’s effective tax rate.
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred income tax assets are as follows:
  As of December 31,
Current deferred tax assets/(liabilities): 2022 2021
State taxes $ 756  $ 441 
Amortization 61  109 
Research and development credits 1,199,256  138,581 
Capitalized research and development costs 1,000,777  — 
Lease liability 16,565  33,906 
Contingent legal accrual 1,306,097  — 
Capital loss carryforwards 8,824,896  — 
Net operating loss 30,648,168  8,887,647 
Other 975,897  446,623 
Gross deferred tax assets 43,972,473  9,507,307 
Valuation allowance (43,957,489) (9,373,577)
Net deferred tax assets $ 14,984  $ 133,730 
Deferred tax liabilities
Right-of-use asset $ (14,984) $ (30,939)
Discount - Amended Credit Agreement —  (102,791)
Total deferred tax liabilities (14,984) (133,730)
Net deferred tax assets $ —  $ — 
The provision for income taxes on earnings subject to income taxes differs from the statutory Federal rate at December 31, 2022 and 2021, due to the following:
  As of December 31,
  2022 2021
Expected income tax benefit at federal statutory tax rate $ (4,089,720) $ (1,789,217)
State income taxes, net of federal benefit (749,744) (475,287)
Change in fair value of warrants (76,672) 4,445 
Change in valuation allowance (892,837) 1,783,362 
Uncertain tax positions 884,911  557,016 
Reduction in compound derivative 4,974,768  — 
Non-deductible interest 35,624  36,731 
Stock compensation 69,754  31,863 
Research and development credits (281,709) (168,514)
Rate adjustment —  785 
Other permanent difference 132,366  20,916 
Provision for income taxes $ 6,741  $ 2,100 
The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Due to the substantial doubt related to the Company’s ability to utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2022. As a result of this valuation allowance, there are no income tax benefits reflected in the accompanying Consolidated Statements of Operations to offset pre-tax losses. During the year ended December 31, 2022, the valuation allowance increased by $34,583,912.
The Tax Cuts and Jobs Act of 2017 subjects a U.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company elects to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.
On April 22, 2020, the Company entered into the PPP Loan with the PPP Loan Lender. In accordance with the Consolidated Appropriations Act, 2021 enacted on December 27, 2020, certain qualified expenses used with the funds of the PPP Loan are fully deductible for Federal income tax purposes. In 2021, the Company received forgiveness of the PPP loan. This amount is not considered taxable for Federal or state income tax purposes.
Under the FASB’s accounting guidance related to income tax positions, among other things, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the guidance provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows:
  As of December 31,
  2022 2021
Unrecognized tax positions, beginning of the year $ 1,784,626  $ 1,134,173 
Gross increase - current period tax positions 1,087,413  687,598 
Gross decrease – prior period tax positions (19) (37,145)
Unrecognized tax positions, end of year $ 2,872,020  $ 1,784,626 
If recognized, none of the unrecognized tax positions would impact the Company’s income tax benefit or effective tax rate as long as the Company’s net deferred tax assets remain subject to a full valuation allowance. The Company does not expect any significant increases or decreases to the Company’s unrecognized tax positions within the next twelve months.
The Company had no accrual for interest or penalties on the Company’s Consolidated Balance Sheets at December 31, 2022 and 2021 and has not recognized interest and/or penalties in the Consolidated Statements of Operations for the years then ended