Note 4 - Income Taxes

We have incurred net operating losses since inception. At December 31, 2022 and 2021, we had available federal and state net operating loss carryforwards of $24.0 million and $12.5 million, respectively. The federal net operating losses generated in 2018 and later of $23.7 million will carry forward indefinitely. Net operating losses generated prior to 2018 will expire 2037. We have not recognized any deferred tax assets related to the federal orphan drug or other research and development tax credits as of December 31, 2022 or 2021. The federal research and development tax credits have a 20-year carryforward period.

Pursuant to Code Sec. 382 of the Internal Revenue Code (“the Code”), the utilization of our net operating loss carryforwards could be limited as a result of a cumulative change in stock ownership of more than 50% over a three-year period. We have not completed a Sec. 382 study and as such our net operating loss carryforwards may be subject to such limitation.

Our provision (benefit) for income taxes for the years ended December 31, 2022 and 2021 was as follows:

 Schedule of Provision for Income Taxes

A deferred tax liability was recorded on March 19, 2018 when we received CoNCERT’s license and Know-How in exchange for our common stock that had been issued in an Internal Revenue Code Section 351 Transaction. The Section 351 Transaction treats the acquisition of the license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes, we recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets for the financial reporting basis of $11,038,929 and the tax basis of $1,782.

We recorded the benefit of net operating losses in our consolidated financial statements to the extent possible as a reduction in the deferred tax liability created by the future financial statement amortization of the intangible asset from the acquired CoNCERT license and Know-How prior to its full impairment at December 31, 2022. For the year ended December 31, 2021, we recorded a federal income tax benefit of $530,611 as a result of offsetting our deferred tax liability (related to the CoNCERT asset) by the deferred tax assets resulting from our net operating loss and the amortization of the intangible asset related to CoNCERT. No current income tax benefit or expense was recorded for 2022 since the deferred tax liability was offset completely as of December 31, 2021 and we expect to generate future taxable net operating losses. At December 31, 2022, the remaining deferred tax liability was eliminated as a result of the impairment of the intangible.

A reconciliation of our effective income tax rate and statutory income tax rate for the years ended December 31, 2022 and 2021 is as follows:

 Schedule of Effective Income Tax Rate Reconciliation

The significant components of our deferred tax assets and liabilities for Federal and state income taxes consisted of the following:

 Schedule of Deferred Tax Assets and Liabilities

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to amortize them over five or fifteen years pursuant to IRC Section 174. During 2022, for income tax purposes, we capitalized approximately $7.2 million of research and development expenditures.

In 2022, as part of an evaluation of our tax attributes, we recharacterized approximately $7.4 million of startup costs previously capitalized as an IRC Section 195 asset as net operating losses. The recharacterization has no impact on total deferred tax assets since we had previously and will continue to provide a full valuation allowance on our unutilized net deferred tax assets.

The valuation allowance generally reflects limitations on our ability to use the tax attributes and reduces the value of such attributes to the more-likely-than-not realizable amount. We assessed the available positive and negative evidence to estimate if sufficient taxable income will be generated to use the existing net deferred tax assets. Based on a weighting of the objectively verifiable negative evidence primarily in the form of cumulative operating losses, we believe that it is not more likely than not that the deferred tax assets will be realized and, accordingly, a full valuation allowance has been established. The valuation allowance increased by $7.4 million and $2.9 million for the years ended December 31, 2022 and 2021, respectively.

We recognize potential liabilities for uncertain tax positions using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We have not recorded any uncertain tax positions. As of December 31, 2022 and 2021, we had no accrued penalties or interest related to uncertain tax positions.

We file U.S. Federal income tax returns, as well as state tax returns for California, Florida and Maryland. There are currently no income tax examinations underway for these jurisdictions. However, tax years from and including 2017 remain open for examination by federal and state income tax authorities.