Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

12. Income Taxes


As of September 30, 2021, the Company has $80.2 million, $80.2 million and $4.0 million of federal, state and foreign net operating losses, respectively. The federal and state net operating losses will begin to expire in 2030 and the foreign net operating losses begin to expire in 2027. As of September 30, 2021, the Company has federal and state research and development tax credit carryforwards of $0.7 million and $0.5 million available to reduce future tax liabilities which will begin to expire in 2035 and 2030, respectively. Realization of the deferred tax asset is contingent on future taxable income and based upon the level of historical losses, management has concluded that the deferred tax asset does not meet the more-likely-than-not threshold for realizability. Accordingly, a full valuation allowance continues to be recorded against the Company’s deferred tax assets as of September 30, 2021 and 2020. The valuation allowance increased $14.3 million during the year ended September 30, 2021 and $4.9 million during the year ended September 30, 2020.


Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carryforwards may be subject to annual limitations, against taxable income in future periods, which could substantially limit the eventual utilization of such carryforwards. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the net operating loss carryforwards are subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation, there would be a reduction in the deferred tax assets with an offsetting reduction in the valuation allowance.


When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely-than-not be realized. The determination as to whether the tax benefit will more-likely-than-not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes interest and penalties accrued on any unrecognized tax benefits within the provision for income taxes in its consolidated statements of operations. No unrecognized tax benefits have been recorded.



Sonnet BioTherapeutics Holdings, Inc.

Notes to Consolidated Financial Statements


The tax effects of the temporary differences that gave rise to deferred taxes were as follows:

    2021     2020  
    As of September 30,  
    2021     2020  
Deferred tax assets:                
Net operating loss carryforwards   $ 21,398,036     $ 7,108,066  
Research and development credit carryforward     1,263,451       1,263,451  
Share-based compensation     146,192       104,023  
Lease liability     26,570       58,242  
Accruals and other     144,215       207,612  
Property and equipment     3,039        
Gross deferred tax assets     22,981,503       8,741,394  
Less: valuation allowance     (22,946,868 )     (8,683,047 )
  Net deferred tax assets     34,635       58,347  
Deferred tax liabilities:                
Property and equipment         (463 )
Right-of-use asset     (34,635 )     (57,884 )
Net deferred tax assets   $     $  


The Company recorded no income tax expense or benefit for the years ended September 30, 2021 and 2020. A reconciliation of income tax (expense) benefit at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows:

    Year Ended September 30,  
    2021     2020  
U.S. federal statutory rate     (21.0 )%     (21.0 )%
State taxes, net of federal benefit     (6.6 )     (4.0 )
Change in valuation allowance     26.4     20.4
Research and development credit         (4.0 )
Permanent differences     (0.1 )     7.7
Foreign tax rate differential     0.7     0.5
Other     0.6     0.4
Effective income tax rate     %     %