Registration of securities issued in business combination transactions

Income Taxes

v3.23.3
Income Taxes
6 Months Ended 12 Months Ended
Jun. 30, 2023
Dec. 31, 2022
Income Taxes [Abstract]    
Income Taxes

Note 6 — Income Taxes

Our effective tax rate was 0.00% and 0.44% for the six months ended June 30, 2023 and 2022, respectively. Differences between the statutory rate and our effective tax rate resulted from changes in valuation allowance and permanent differences for tax purposes in the treatment of certain nondeductible expenses. Our effective tax rate was impacted by indefinite-lived deferred tax liabilities in the 2022 period, resulting primarily from the acquisition of 365 Cannabis in 2021, which cannot be considered as a source of future taxable income available to utilize recorded deferred tax

assets based on the Company’s scheduling and the 80% limit on the utilization of net operating loss carry forwards under current U.S. tax law. While there were none in the 2023 period, we paid nominal amounts for income taxes, net of refunds received, in certain state and national jurisdictions during the six months ended June 30, 2022. Uncertain tax positions of less than $0.1 million were reversed during the six months ended June 30, 2022 as a result of the Internal Revenue Service’s dismissal of potential penalties.

Note 11 — Income Taxes

The following table sets forth the expense or (benefit) for income taxes:

 

Year Ended December 31,

   

2022

 

2021

Current income tax expense (benefit)

 

 

 

 

 

 

 

 

U.S. federal

 

$

(50,000

)

 

$

 

U.S. state

 

 

2,827

 

 

 

4,300

 

Foreign

 

 

6,308

 

 

 

6,270

 

Total current income taxes

 

 

(40,865

)

 

 

10,570

 

Deferred income tax benefit

 

 

 

 

 

 

 

 

U.S. federal

 

$

(675,290

)

 

$

(2,274,295

)

U.S. state

 

 

 

 

 

 

Total deferred income benefit

 

 

(675,290

)

 

 

(2,274,295

)

Total income tax benefit

 

$

(716,155

)

 

$

(2,263,725

)

The following table sets forth reconciliations of the income tax expense at the statutory federal income tax rate to actual expense based on our loss before income taxes:

 

Year Ended December 31,

   

2022

 

2021

Income tax expense (benefit) attributable to:

 

 

 

 

 

 

 

 

Federal

 

$

(16,749,778

)

 

$

(6,692,267

)

State, net of federal benefit

 

 

(853,392

)

 

 

(672,148

)

Foreign tax rate differential

 

 

(11,543

)

 

 

(138,292

)

Permanent differences

 

 

472,270

 

 

 

(230,034

)

Goodwill impairment

 

 

9,172,756

 

 

 

2,658,665

 

Rate changes

 

 

(992

)

 

 

54,295

 

Changes in valuation allowance

 

 

7,501,917

 

 

 

3,361,603

 

Provision to return adjustment

 

 

62,788

 

 

 

273,489

 

Deferred true-ups

 

 

(247,839

)

 

 

(928,743

)

Other adjustments

 

 

(62,342

)

 

 

49,707

 

Effective income tax expense (benefit)

 

$

(716,155

)

 

$

(2,263,725

)

The following table sets forth our deferred income tax assets and liabilities:

 

As of December 31,

   

2022

 

2021

Noncurrent deferred tax assets:

 

 

   

 

 

Employee compensation

 

$

136,154

 

$

820,410

Debt issuance costs

 

 

39,381

 

 

138,778

Revenue recognition

 

 

64,662

 

 

105,735

Settlement accrual

 

 

178,549

 

 

146,604

Fixed assets

 

 

774,936

 

 

242,006

Section 174 capitalization

 

 

1,121,311

 

 

Federal and state net operating loss

 

 

13,860,338

 

 

10,673,908

Foreign net operating loss

 

 

4,641,293

 

 

4,904,857

Other

 

 

280,430

 

 

225,340

Total deferred tax assets

 

$

21,097,054

 

$

17,257,638

 

As of December 31,

   

2022

 

2021

Noncurrent deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

 

(1,713,666

)

 

 

(6,051,459

)

Total deferred tax liabilities

 

$

(1,713,666

)

 

$

(6,051,459

)

Valuation allowance

 

 

(19,383,388

)

 

 

(11,881,470

)

Deferred tax asset (liability), net after valuation allowance

 

$

 

 

$

(675,291

)

During the year ended December 31, 2022, valuation allowances on deferred tax assets that are not anticipated to be realized increased by $7.5 million, substantially all of which was recorded to deferred expense while an insignificant portion was recorded in final purchase accounting. During the year ended December 31, 2021, valuation allowances on deferred tax assets that were not anticipated to be realized increased by $3.6 million of which $0.2 million was recorded in purchase accounting and the remainder of $3.4 million was recorded to deferred expense.

Our deferred tax valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax losses. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that the deferred tax assets will not be realized. We have evaluated the realizability of our deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. Based on this analysis, we have determined that the valuation allowances recorded as of December 31, 2022 and December 31, 2021 are appropriate.

We have deferred tax assets related to U.S. federal tax and state tax carryforwards for net operating losses (“NOL”) in the amount of $58.9 million. The majority of U.S. federal NOL carryforwards are carried forward indefinitely. Federal NOLs generated after 2017 have an indefinite carryforward and are only available to offset 80 percent of taxable income beginning in 2021. U.S. state NOL carryforwards expire at various dates of which the majority begin to expire in 2039. We have deferred tax assets related to foreign NOL carryforwards, which begin to expire in 2034, in the amount of $17.5 million.

We are not currently under examination for any of the major jurisdictions where we conduct business as of December 31, 2022; however, all of our tax years remain subject to examination. Our management does not believe there are significant uncertain tax positions in 2022 and as a result we do not expect any cash payments in the next 12 months; however, uncertain tax positions related to potential penalties in the amount of $30,000 was recorded in connection with business combinations during the year ended December 31, 2020. A reserve for potential penalties for $0.1 million that was established in 2021 was reversed in 2022 as a result of the Internal Revenue Service’s dismissal of the matters. There was no interest related to uncertain tax positions in 2022 or 2021.

We paid less than $0.1 million for income taxes, net of refunds received, in certain state and national jurisdictions during each of the years ended December 31, 2022 and 2021, respectively.

The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases. The IRA is applicable for tax years beginning after December 31, 2022 and had no benefit to our consolidated financial statements for any of the periods presented, and we do not expect it to have a direct material impact on our future results of operations, financial condition, or cash flows.