NOTE 10. Income Taxes

In assessing the realization of the deferred tax assets, the Company considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to lack of available sources of taxable income, the Company recorded a full valuation allowance against its net deferred tax assets as sufficient uncertainty exists regarding the future realization of these assets. As of December 31, 2025 and 2024, the Company recorded a valuation allowance of $143.5 million and $138.0 million, respectively. The valuation allowance changed by $5.5 million and $29.2 million for the years ended December 31, 2025 and 2024, respectively.

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s federal and state net operating loss, research and development credit carryforwards, and other tax attributes may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has experienced changes in prior years and there is a risk that additional ownership changes may occur in the future. If a change in ownership occurs, the NOL carryforwards and other tax attributes could be limited or restricted. At December 31, 2025, the Company has federal and state net operating losses, or NOL, carryforwards of approximately $115.5 million and $203.1 million, respectively. The federal net operating loss carryforward includes losses generated in 2018 and after, which can be carried forward indefinitely. The state net operating loss carryforward includes $0.7 million of losses that can be carried forward indefinitely. The remaining state net operating losses begin to expire in 2039.

At December 31, 2025, the Company has federal and state research and development credit carryforwards of approximately $18.1 million and $12.5 million, respectively. If not utilized, the federal credit carryforwards begin to expire in 2037. $1.0 million of the state credit begins to expire in 2037 and the remainder carries forward indefinitely. Additionally, the Company has an Orphan Drug Credit of $8.9 million as of December 31, 2025, which will begin to expire in 2042 unless previously utilized.

The company accounts for income taxes in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than 50% likelihood of being sustained.

Amounts in the summary rollforward would not impact our effective tax rate if recognized as the Company maintains a full valuation on its net deferred tax assets. The Company is subject to taxation and files income tax returns in the United States, various U.S. states and foreign jurisdictions. The Company’s tax years from 2014 to date are subject to examination by the U.S., and state taxing authorities due to the carryforward of unutilized net operating losses and research and development credits. The general statute of limitations in the foreign jurisdictions where the Company files tax returns is 4 to 5 years. The Company’s policy is to recognize interest expense and penalties related to income tax matters as income tax expense. There was no tax related interest or penalties recognized for the years ended December 31, 2025 and 2024 and 2023.

Deferred income taxes are not required for undistributed earnings of the Company’s foreign subsidiary as they can be distributed tax free and without withholding taxes.

On July 4, 2025, the One Big Beautiful Bill Act (the "Act") was signed into law. The Act reinstates and makes permanent 100% first-year bonus depreciation under Section 168(k) for qualified property acquired and placed in service after January 19, 2025. Additionally, the Act permanently allows immediate expensing of domestic research and experimentation expenditures under Section 174 for tax years beginning after December 31, 2024. The Company has reflected the effects of the Act in its income tax provision in accordance with ASC 740.