| Income Taxes |
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 (NOL) and tax credit carryforwards.
As of September 30, 2020, the Company had U.S. federal and state NOL carryforwards of $42.0 million and $25.6 million, respectively, for income tax purposes with $13.8 million and $19.8 million, respectively, expiring in years 2022 to 2040 and $28.2 million and $5.8 million, respectively, which can be carried forward indefinitely. As of September 30, 2020, the Company also had U.S. federal research and development tax credit carryforwards of $0.9 million, expiring in 2040. The Company’s U.K. subsidiary has U.K. NOL carryforwards of $61.3 million as of September 30, 2020, which can be carried forward indefinitely to be used to offset future U.K. taxable income.
On June 10, 2021 the U.K. Finance Act 2021 was enacted increasing the U.K. tax rate from 19% to 25% effective April 1, 2023. The increase in the tax rate increased the value of the deferred tax assets in the U.K. by $3.7 million with a corresponding valuation allowance of $0.8 million, which resulted in a net income tax benefit of $3.0 million for the three and nine months ended June 30, 2021.
A reconciliation of income tax (benefit) expense and the amount computed by applying the U.S. statutory rate of 21% to (loss) income before income taxes is as follows:
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Three Months Ended |
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Nine Months Ended |
|
June 30, |
|
June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense at U.S. federal statutory rates |
$ |
(1,168,845) |
|
$ |
(584,825) |
|
$ |
1,872,314 |
|
$ |
(1,493,179) |
State income tax (benefit) expense, net of federal (benefit) expense |
|
(90,502) |
|
|
(45,268) |
|
|
144,971 |
|
|
(115,615) |
Non-deductible expenses |
|
(2,807) |
|
|
332,230 |
|
|
(2,807) |
|
|
335,869 |
Effect of stock options exercised |
|
53,011 |
|
|
— |
|
|
— |
|
|
— |
Effect of common stock purchase warrants exercised |
|
— |
|
|
— |
|
|
(2,038,919) |
|
|
— |
Effect of Paycheck Protection Program funds |
|
8,784 |
|
|
— |
|
|
(113,442) |
|
|
— |
U.S. research and development tax credit |
|
(919,415) |
|
|
— |
|
|
(919,415) |
|
|
— |
Effect of foreign income tax rates |
|
(3,716,935) |
|
|
(16,478) |
|
|
(3,744,512) |
|
|
49,908 |
Effect of global intangible low taxed income |
|
78,626 |
|
|
85,522 |
|
|
148,383 |
|
|
101,642 |
Change in valuation allowance |
|
2,834,482 |
|
|
415,449 |
|
|
1,828,730 |
|
|
1,097,900 |
Other, net |
|
50,538 |
|
|
53,872 |
|
|
51,626 |
|
|
54,094 |
Income tax (benefit) expense |
$ |
(2,873,063) |
|
$ |
240,502 |
|
$ |
(2,773,071) |
|
$ |
30,619 |
Significant components of the Company’s deferred tax assets and liabilities are as follows:
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June 30, |
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September 30, |
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2021 |
|
2020 |
Deferred tax assets: |
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|
|
|
Federal net operating loss carryforwards |
$ |
8,269,223 |
|
$ |
8,759,589 |
State net operating loss carryforwards |
|
1,647,082 |
|
|
1,682,104 |
Foreign net operating loss carryforwards – U.K. |
|
15,259,909 |
|
|
11,655,853 |
Foreign capital allowance – U.K. |
|
149,371 |
|
|
113,522 |
U.S. research and development tax credit carryforwards |
|
919,415 |
|
|
— |
Share-based compensation |
|
770,598 |
|
|
1,255,983 |
Interest expense |
|
1,165,193 |
|
|
850,248 |
Change in fair value of derivative liabilities |
|
654,354 |
|
|
195,265 |
Other, net – U.K. |
|
123,341 |
|
|
93,739 |
Other, net – U.S. |
|
187,644 |
|
|
179,677 |
Gross deferred tax assets |
|
29,146,130 |
|
|
24,785,980 |
Valuation allowance for deferred tax assets |
|
(15,903,470) |
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|
(14,074,740) |
Net deferred tax assets |
|
13,242,660 |
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|
10,711,240 |
Deferred tax liabilities: |
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In-process research and development |
|
(882,427) |
|
|
(882,427) |
Developed technology |
|
— |
|
|
(369,237) |
Covenant not-to-compete |
|
(37,711) |
|
|
(49,832) |
Other, net – Malaysia |
|
(11,297) |
|
|
(11,297) |
Other, net – U.S. |
|
(6,371) |
|
|
(6,371) |
Net deferred tax liabilities |
|
(937,806) |
|
|
(1,319,164) |
Net deferred tax asset |
$ |
12,304,854 |
|
$ |
9,392,076 |
The deferred tax amounts have been classified on the accompanying unaudited condensed consolidated balance sheets as follows:
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June 30, |
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September 30, |
|
2021 |
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2020 |
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|
|
|
|
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Deferred tax asset – U.K. |
$ |
12,379,578 |
|
$ |
9,466,800 |
Total deferred tax asset |
$ |
12,379,578 |
|
$ |
9,466,800 |
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|
|
|
|
|
Deferred tax liability – U.S. |
$ |
(63,427) |
|
$ |
(63,427) |
Deferred tax liability – Malaysia |
|
(11,297) |
|
|
(11,297) |
Total deferred tax liability |
$ |
(74,724) |
|
$ |
(74,724) |
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