Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.24.1
Income Taxes
 12 Months Ended
Sep. 30, 2023
Income Taxes [Abstract]  
Income Taxes Note 14 – Income Taxes (Restated)

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.

Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretations, and rule-making from the Internal Revenue Service, the SEC, the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that state jurisdictions will continue to determine and announce their conformity to the Tax Act which would have an impact on the annual effective tax rate. The Company’s calculations are based on the information available, prepared or analyzed (including computations) in reasonable detail.

The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to its attention that would indicate that a revision to its estimates is necessary. In evaluating the Company’s ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country-by-country basis, including past operating results, forecasts of future taxable income, and the potential Section 382 limitation on the NOL carryforwards due to a change in control. In determining future taxable income, management makes assumptions to forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the forecasts of the future taxable income in each tax jurisdiction and are consistent with the forecasts used to manage the Company’s business. The Company had a cumulative pretax loss in the U.S. for fiscal 2023 and the two preceding fiscal years. Forming a conclusion that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses in recent years. Management has projected future pretax losses in the U.S. driven by the investment in research and development and based on our analysis, concluded that a full valuation allowance should be recorded related to federal and state NOL carryforwards as of September 30, 2023. The valuation allowance against U.S. deferred tax assets was increased by $20.0 million during the year ended September 30, 2023. As of September 30, 2023 and 2022 respectively, the Company has recorded a valuation allowance of $61.7 million and $41.7 million against U.S. deferred tax assets. In addition, the Company’s U.K. holding company for the non-U.S. operating companies, The Female Health Company Limited, continues to have a full valuation allowance of $3.2 million as of September 30, 2023 and 2022. The operating U.K. subsidiary, The Female Health Company (UK) plc does not have a valuation allowance due to projections of future taxable income. The Company projects that the deferred tax assets of The Female Health Company (UK) plc will be realized over a significant period of time, which may exceed 20 years. Veru Biopharma UK Limited has a full valuation allowance of $0.3 million.

As of September 30, 2023, the Company had U.S. federal and state NOL carryforwards of approximately $138.6 million and $61.8 million, respectively, for income tax purposes with $29.7 million and $35.0 million, respectively, expiring in fiscal years 2024 to 2043 and $108.8 million and $26.8 million, respectively, which can be carried forward indefinitely. The Company also has U.S. federal research and development tax credit carryforwards of $8.3 million, expiring in fiscal years 2038 to 2043. The Company’s U.K. subsidiary and Veru Biopharma UK Limited have U.K. NOL carryforwards of approximately $63.0 million as of September 30, 2023, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

The Tax Cuts and Jobs Act of 2017, which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 of the Internal Revenue Code (“Section 174”) effective for the Company October 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years, for U.S.-based research, and over 15 years, for foreign-based research. As of September 30, 2023, we recorded a decrease to income tax benefit and an increase to deferred tax assets, before applying a valuation allowance, of approximately $9.8 million as a result of the amended provision under Section 174. Because the Company has a full valuation allowance recorded against U.S. deferred tax assets, the net impact to income tax benefit and deferred tax assets from the amended provision under Section 174 is zero.

Loss before income taxes was taxed by the following jurisdictions for the years ended September 30, 2023 and 2022:

 

2023

2022

Domestic

$

(90,522,387)

$

(82,451,062)

Foreign

(2,150,099)

(1,353,159)

Total

$

(92,672,486)

$

(83,804,221)

A reconciliation between the effective tax rate and the U.S. statutory rate and the related income tax expense is as follows:

2023

2022

Amount

Tax Rate

Amount

Tax Rate

Income tax benefit at U.S. federal statutory rates

$

(19,461,222)

21.0

%

$

(17,598,886)

21.0

%

State income tax benefit, net of federal benefits

(1,506,855)

1.6

(1,362,657)

1.6

Non-deductible expenses

330,281

(0.3)

76,913

(0.1)

U.S. research and development tax credit

178,378

(0.2)

(5,720,374)

6.9

Effect of foreign income tax rates

454,808

(0.5)

409,048

(0.5)

Effect of common stock options exercised

180,847

(0.2)

(1,580,756)

1.9

Effect of global intangible low-taxed income

(24,691)

(0.0)

24,691

(0.0)

Change in valuation allowance

20,205,808

(21.8)

25,852,309

(30.9)

Other, net

122,852

(0.1)

136,109

(0.2)

Income tax expense

$

480,206

(0.5)

%

$

236,397

(0.3)

%

The federal and state income tax expense (benefit) for the years ended September 30, 2023 and 2022 is summarized below:

2023

2022

Deferred – U.S.

$

(63,426)

$

—

Deferred – U.K.

262,612

(42,089)

Deferred – Malaysia

(21,687)

118,295

Subtotal

177,499

76,206

Current – U.S.

(8,624)

126,079

Current – Malaysia

311,331

34,112

Subtotal

302,707

160,191

Income tax expense

$

480,206

$

236,397

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

2023

2022

Deferred tax assets:

Federal net operating loss carryforwards

$

29,100,871

$

23,216,138

State net operating loss carryforwards

3,322,715

2,819,107

Foreign net operating loss carryforwards – U.K.

15,749,809

15,773,497

Foreign capital allowance – U.K.

174,748

128,490

Share-based compensation – U.K.

217,821

265,631

U.S. research and development tax credit carryforward

8,303,411

8,481,789

U.S. research and development expense

9,771,166

—

Accrued compensation

190,397

1,227,290

Share-based compensation

7,896,221

4,325,354

Interest expense

2,602,890

2,206,484

U.S. credit loss provision

885,562

—

Change in fair value of derivative liability

—

220,607

Other, net – Malaysia

4,046

—

Other, net – U.K.

2,500

—

Other, net – U.S.

71,509

81,507

Gross deferred tax assets

78,293,666

58,745,894

Valuation allowance for deferred tax assets

(65,135,088)

(44,929,280)

Net deferred tax assets

13,158,578

13,816,614

Deferred tax liabilities:

Change in fair value of derivative liability

(449,812)

—

In process research and development

—

(882,427)

Covenant not-to-compete

(1,347)

(17,508)

Other, net – Malaysia

—

(17,641)

Other

—

(14,120)

Net deferred tax liabilities

(451,159)

(931,696)

Net deferred tax asset

$

12,707,419

$

12,884,918

The deferred tax amounts have been classified in the accompanying consolidated balance sheets as follows:

2023

2022

Long-term deferred tax asset – U.K.

$

12,703,373

$

12,965,985

Long-term deferred tax asset – Malaysia

4,046

—

Total long-term deferred tax asset

$

12,707,419

$

12,965,985

Long-term deferred tax liability – U.S.

$

—

$

(63,426)

Long-term deferred tax liability – Malaysia

—

(17,641)

Total long-term deferred tax liability

$

—

$

(81,067)

 

ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 developed a two-step process to evaluate a tax position and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. 

The Company files tax returns in all appropriate jurisdictions, including foreign, U.S. federal and state tax returns. The following summarizes open tax years in the relevant jurisdictions:

For the U.S., a tax return may be audited any time within 3 years from filing date or 3 years after an NOL is utilized. The U.S. open tax years are for fiscal 2004 through 2007, fiscal 2015 through fiscal 2019, and fiscal 2022, for which the Company is carrying forward NOLs, which expire in years 2024 through 2038 or are being carried forward indefinitely with no expiration.

 

For Malaysia, a tax return may be audited any time within 5 years from filing date (7 months after the fiscal year end). The Malaysia open tax years are for 2018 through 2022, which expire on December 31, 2023 through 2027.

 

For the U.K., a tax return may be audited within 1 year from the later of: the filing date or the filing deadline (1 year after the end of the accounting period). The U.K. open tax year is for 2022, which expires in 2024.

The fiscal 2023 tax returns for all jurisdictions have not been filed as of the date of this filing. As of September 30, 2023 and 2022, the Company has no recorded liability for unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions as income tax expense as incurred. No material expense for interest and penalties was recognized for the years ended September 30, 2023 and 2022.