Veru Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

Income Taxes

9 Months Ended

Jun. 30, 2020

Note 13 – Income Taxes

The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of its assets and liabilities, and for net operating loss and tax credit carryforwards.

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) repealed the alternative minimum tax (AMT) for corporations. The law provides that AMT carryovers can be utilized to reduce or eliminate the tax liability in subsequent years or to obtain a tax refund. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, accelerates the ability to claim a refund of the entire refundable credit to 2018 with an election when filing. The Tax Act previously allowed a 50% refundable credit for tax years beginning in 2018 through 2020, with a 100% credit refund in 2021. At June 30, 2020, the Company has $0.5 million of AMT credit carryovers in prepaid expenses and other current assets due to the expectation, as a result of the CARES Act, that the AMT credits will be refundable over the next year.

As of September 30, 2019, the Company had U.S. federal and state net operating loss carryforwards of $42.6 million and $25.8 million, respectively, for income tax purposes with $14.4 million and $19.9 million, respectively, expiring in years 2022 to 2038 and $28.2 million and $5.9 million, respectively, which can be carried forward indefinitely. The Company’s U.K. subsidiary has U.K. net operating loss carryforwards of $61.7 million as of September 30, 2019, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

A reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% to income before income taxes is as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

Income tax benefit at U.S. federal statutory rates	$	(584,825)	$	(582,652)	$	(1,493,179)	$	(1,856,337)
State income tax benefit, net of federal benefits		(45,268)		(138,089)		(115,615)		(439,952)
Non-deductible expenses		332,230		2,269		335,869		7,052
Effect of foreign income tax rates		(16,478)		43		49,908		(3,484)
Effect of global intangible low taxed income		85,522		2,554		101,642		66,182
Change in valuation allowance		415,449		716,442		1,097,900		2,367,633
Other, net		53,872		(1,025)		54,094		(23,887)
Income tax expense (benefit)	$	240,502	$	(458)	$	30,619	$	117,207

Significant components of the Company’s deferred tax assets and liabilities are as follows:


	June 30,		September 30,
	2020		2019
Deferred tax assets:
Federal net operating loss carryforwards	$	8,854,855	$	8,971,569
State net operating loss carryforwards		1,686,902		1,689,536
Foreign net operating loss carryforwards – U.K.		10,600,648		10,486,476
Foreign capital allowance – U.K.		103,400		103,400
Share-based compensation		1,116,240		804,378
Interest expense		757,141		—
Other, net – U.K.		50,781		50,781
Other, net – U.S.		592,237		434,764
Gross deferred tax assets		23,762,204		22,540,904
Valuation allowance for deferred tax assets		(10,928,109)		(9,830,209)
Net deferred tax assets		12,834,095		12,710,695
Deferred tax liabilities:
In-process research and development		(4,072,740)		(4,072,740)
Developed technology		(383,092)		(424,657)
Covenant not-to-compete		(53,872)		(65,993)
Other, net – Malaysia		17,251		(3,865)
Other, net – U.S.		(6,376)		(6,376)
Net deferred tax liabilities		(4,498,829)		(4,573,631)
Net deferred tax asset	$	8,335,266	$	8,137,064

The deferred tax amounts have been classified on the accompanying unaudited condensed consolidated balance sheets as follows:


	June 30,		September 30,
	2020		2019

Deferred tax asset – U.K.	$	8,610,759	$	8,433,669
Deferred tax asset – Malaysia		17,247		—
Total deferred tax asset	$	8,628,006	$	8,433,669

Deferred tax liability – U.S.	$	(292,740)	$	(292,740)
Deferred tax liability – Malaysia		—		(3,865)
Total deferred tax liability	$	(292,740)	$	(296,605)