| Income Taxes |
Note 14 – 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 $41.7 million and $25.7 million, respectively, for income tax purposes with $13.5 million and $19.8 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. NOL carryforwards of $61.3 million as of September 30, 2020, which can be carried forward indefinitely to be used to offset future U.K. taxable income.
A reconciliation of income tax expense (benefit) and the amount computed by applying the U.S. statutory rate of 21% to income (loss) before income taxes is as follows:
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Three Months Ended
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December 31,
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2020
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2019
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Income tax expense (benefit) at U.S. federal statutory rates
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$
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3,634,260
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$
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(710,188)
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State income tax expense (benefit), net of federal expense (benefits)
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281,396
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(55,000)
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Effect of stock options exercised
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(64,290)
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—
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Effect of common stock purchase warrants exercised
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(2,038,919)
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—
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Effect of Paycheck Protection Program funds
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(95,886)
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—
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Effect of foreign income tax rates
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(32,570)
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42,554
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Effect of global intangible low taxed income
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125,145
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50,451
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Change in valuation allowance
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(1,732,786)
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592,710
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Other, net
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1,952
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2,730
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Income tax expense (benefit)
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$
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78,302
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$
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(76,743)
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
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December 31,
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September 30,
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2020
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2020
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Deferred tax assets:
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Federal net operating loss carryforwards
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$
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7,677,224
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$
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8,759,589
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State net operating loss carryforwards
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1,606,045
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1,682,104
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Foreign net operating loss carryforwards – U.K.
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11,618,351
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11,655,853
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Foreign capital allowance – U.K.
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113,522
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113,522
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Share-based compensation
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1,005,282
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1,255,983
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Interest expense
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—
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850,248
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Other, net – U.K.
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93,739
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93,739
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Other, net – U.S.
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528,251
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374,942
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Gross deferred tax assets
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22,642,414
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24,785,980
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Valuation allowance for deferred tax assets
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(12,341,954)
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(14,074,740)
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Net deferred tax assets
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10,300,460
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10,711,240
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Deferred tax liabilities:
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In-process research and development
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(882,427)
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(882,427)
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Developed technology
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—
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(369,237)
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Covenant not-to-compete
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(45,791)
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(49,832)
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Other, net – Malaysia
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(11,297)
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(11,297)
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Other, net – U.S.
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(6,371)
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(6,371)
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Net deferred tax liabilities
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(945,886)
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(1,319,164)
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Net deferred tax asset
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$
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9,354,574
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$
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9,392,076
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The deferred tax amounts have been classified on the accompanying unaudited condensed consolidated balance sheets as follows:
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December 31,
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September 30,
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2020
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2020
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Deferred tax asset – U.K.
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$
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9,429,298
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$
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9,466,800
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Total deferred tax asset
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$
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9,429,298
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$
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9,466,800
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Deferred tax liability – U.S.
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$
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(63,427)
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$
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(63,427)
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Deferred tax liability – Malaysia
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(11,297)
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(11,297)
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Total deferred tax liability
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$
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(74,724)
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$
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(74,724)
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