Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.1
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Taxes [Abstract]  
Income Taxes
12.
Income Taxes
 
The effective tax rate for the years ended December 31, 2022 and 2021 was 1.7 percent and zero percent, respectively.
 
A reconciliation of income tax computed at the statutory federal income tax rate to the provision (benefit) for income taxes included in the accompanying statements of comprehensive income (loss) is as follows for the years ended December 31, 2022 and 2021:
 
   
2022
    
2021
  
Income tax (benefit) provision at federal statutory rate     21.0
 %
     (21.0
 )%
Valuation allowance
     (21.4
 )
     11.9
  
State income tax, net of federal benefit
     4.9
       (4.8
 )
Warrants
     —
       15.3
  
Stock options
     0.4
       (0.1
 )
Research and development
     (3.1
 )
     (1.1
 )
Other
     (0.1
 )
     (0.2
 )
Effective tax rate
     1.7
 %
     —
 %


The components of income tax provision (benefit) consisted of the following for the years ended December 31, 2022 and 2021 (in thousands):

    2022
    2021
 
Income (loss) before income taxes:
   $ 18,203     $ (56,693 )
                 
Current:
                
Federal
   $ 279     $ —  
State
     36       —  
Total current tax provision (benefit)
     315       —  
Deferred:
                
Federal
     —       —  
State
     —       —  
Total tax provision (benefit)
  $ 315     $ —  

Significant components of the Company’s deferred tax assets and liabilities are summarized in the tables below as of December 31, 2022 and 2021 (in thousands):
 
   
2022
    
2021
  
Deferred tax assets:
            
Federal and state operating loss carryforwards   $ 13,087     $ 19,244  
Acquired intangibles
     547      
547
  
Deferral of research and development costs
    2,820       —  
Organizational costs
     7      
7
  
Other     62       18  
Stock-based compensation
     1,152      
811
  
Research and development credit carryforward
     731      
1,035
  
Subtotal
     18,406      
21,662
  
Valuation allowance
    
(17,770
)
    
(21,662
)
Total deferred tax assets, net of valuation allowance
    
636
      
—
  
Deferred tax liabilities:
                
Deferred revenue
    (636 )     —  
Total deferred tax liabilities
    
(636
)
    
—
  
Net deferred tax assets
  
$
—
    
$
—
  

As of December 31, 2022 and 2021, the Company had gross deferred tax assets of approximately $18.4 million and $21.7 million, respectively. Realization of the deferred tax assets is primarily dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has cumulative pre‑tax losses and faces significant challenges to becoming profitable in the future. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance of $17.8 million and $21.7 million as of December 31, 2022 and 2021, respectively. U.S. net deferred tax assets will continue to require a valuation allowance until the Company can demonstrate their realizability through sustained profitability or another source of income.
 
As of December 31, 2022 and 2021, the tax effect of the Company’s federal net operating loss carryforwards was approximately $10.9 million and $15.7 million, respectively. The Company had federal research credit carryforwards as of December 31, 2022 and 2021 of approximately $0.7 million and $1.0 million, respectively. The federal net operating loss carryforwards will not expire and the tax credit carryforwards will begin to expire in 2041 if not utilized.  As of December 31, 2022 and 2021, the Company had state net operating loss carryforwards with a tax effect of approximately $2.2 million and $3.6 million, respectively. The Company did not have any state research credit carryforwards as of December 31, 2022 and 2021. The state net operating loss carryforwards will begin to expire in 2028.
 
The Company utilized federal and state net operating tax carryforwards with a tax effect in the amount of $4.8 million and $1.4 million, respectively, to offset taxable income for the year ended December 31, 2022. In addition, the Company also utilized its federal research credit carryforwards in the amount of $0.9 million to partially offset its tax liability for the year ended December 31, 2022.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. Generally, in addition to certain entity reorganizations, the limitation applies when one or more “5-percent shareholders” increase their ownership, in the aggregate, by more than 50 percentage points over a 3 year testing period, or beginning the day after the most recent ownership change, if shorter. The annual limitation may result in the expiration of net operating losses and credits before utilization. As a result of the Merger, the Company recorded deferred tax assets of $10.3 million relating to net operating loss carryforwards which were fully offset by a valuation allowance. The $10.3 million net deferred tax assets recorded in relation to the Merger did not include federal and state net operating loss carryforwards that were estimated to expire under Internal Revenue Code Sections 382 as a result of the Merger. The Company has not yet evaluated the impact of Section 382 and Section 383 on its remaining tax attributes that were generated by Ocuphire since the formation of the Company in 2018.
 
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions as of December 31, 2022 and 2021, and as such, no interest or penalties were recorded to income tax expense.
 
The Company’s corporate returns are subject to examination beginning with the 2019 tax year for federal income tax purposes and 2018 for state income tax purposes.