AYTU BIOPHARMA, INC Income Taxes Disclosure

Note 13 - Income Taxes

 

For the years ended June 30, 2025, and 2024, there was $0.4 million of income tax expense and $2.1 million of income tax expense from continuing operations, which was an effective tax rate of negative 3.2% and negative 20.6%, respectively. This income tax expense was primarily driven by Section 382 limitation of the IRC on pre-Tax Cuts and Jobs Act (the “TCJA”) and post-TCJA net operating loss (“NOL”) utilization, as further described below, coupled with existing valuation allowances. As of June 30, 2025, and 2024, the Company had $0.3 million and $0.8 million of deferred tax assets (“DTAs”), net of valuation allowance from continuing operations, respectively, included in other non-current assets and $0.3 million and $0.8 million of deferred tax liabilities (“DTLs”) from continuing operations, respectively, included in other non-current liabilities. As of June 30, 2025, and 2024, the Company had $1.1 million of prepaid income taxes included in prepaid expenses and other current assets and $0.3 million of accrued income taxes payable, respectively, recorded in the Company’s consolidated balance sheets. 

 

Section 382 Limitation

 

Under the provisions of the IRC, substantial changes in the Company’s ownership have resulted in limitations on the amount of NOL carryforwards that can be utilized in future years. NOL carryforwards are subject to examination in the year they are utilized regardless of whether the tax year in which they are generated has been closed by statute. The amount subject to disallowance is limited to the NOL utilized. Accordingly, the Company may be subject to examination for prior NOLs generated as such NOLs are utilized.

 

As part of the Company’s Section 382 analysis, an ownership change was determined to have occurred in March 2022 at a point in time when the Company had a net unrealized built-in gain. As such, the NOL generated during that period has been allocated and the post-change NOL (approximately $12 million) was determined to be fully available to offset fiscal 2023 pre-change income subject to the 80% limitation. The Company also determined that an ownership change occurred in June 2023 at a time when the Company was in a net unrealized built-in loss position. As a result of the Section 382 analysis, the Company had $9.3 million of disallowed recognized built-in loss that was carried forward as a net operating loss as of June 30, 2024. For fiscal 2025, an additional $3.6 million of disallowed recognized built-in loss was carried forward as an operating loss. These operating loss carryovers are subject to the June 2023 Section 382 limitation.

 

The Company had federal net operating losses of $516.7 million as of June 30, 2025, which are subject to limitation (as described above). Of the available federal net operating losses, $190.0 million can be carried forward indefinitely, and $324.7 million will completely expire in 2037 as a result of the ownership change. As of June 30, 2025, the Company had research and development credits of $2.9 million, which will begin to expire in 2025 and are also subject to Section 382 limitation. The available state net operating losses, if not utilized to offset taxable income in future periods, will begin to expire in 2025 and will completely expire in 2039.

 

As of June 30, 2025, the Company had various state NOL carryforwards. The determination of the state NOL carryforwards is dependent on apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards.

 

The Company notes there is diversity in practice regarding the treatment of deductions or loss carryforwards that are expected to expire unutilized. Generally, it is not appropriate to use zero as an applicable tax rate and rather, a DTA should be recorded at the applicable tax rate and a valuation of an equal amount would be provided. However, under certain circumstances it may be appropriate to follow an alternative approach and use a zero rate to write off the asset against the valuation allowance, reducing the valuation allowance and gross DTAs disclosed. The Company considered both accounting viewpoints and determined it would present its NOL carryforwards gross with a full valuation allowance and not apply a zero rate to NOL carryforwards expected to expire unutilized.

 

In review of the Company’s consolidated deferred position, excluding NOLs and other tax attributes, the Company is in a net DTA position and therefore all NOLs are being fully valued and not utilized against a net DTL.

 

The provision for income taxes consisted of the following:

 

		Year Ended June 30,
		2025				2024
		(in thousands)
Current:
Federal		$	(215	)		$	1,886
State			652				256
Income tax expense		$	437			$	2,142

 

Income tax expense resulting from applying statutory rates in jurisdictions in which the Company is taxed (federal and various states) differs from the income tax expense in the consolidated financial statements. A reconciliation of the United States federal statutory income tax rates to the Company’s effective tax rate is as follows.

 

		Year Ended June 30,
		2025								2024
		(in thousands, except tax rate)
Tax at statutory rate		$	(2,897	)			21.0	%		$	(2,179	)			21.0	%
State income taxes, net of federal benefit			26				(0.2	)%			(906	)			8.7	%
Stock-based compensation expense			22				(0.1	)%			19				(0.2	)%
Change in valuation allowance			2,465				(17.9	)%			5,172				(49.8	)%
Other			821				(6.0	)%			36				(0.3	)%
Income tax expense		$	437				(3.2	)%		$	2,142				(20.6	)%

 

Deferred income taxes arise from temporary differences in the recognition of certain items for income tax and financial reporting purposes. The approximate tax effects of significant temporary differences, which comprise the deferred tax assets and liabilities, are as follows:

 

		June 30,
		2025				2024
		(in thousands)
Deferred tax assets:
Net operating loss carry forward		$	119,782			$	119,170
Interest			5,101				4,845
Accrued rebates			4,478				3,819
Research and development credits			2,416				2,416
Stock-based compensation expense			1,362				1,259
Intangible assets			1,187				—
Accrued expenses			642				1,027
Section 174 capitalization			864				780
Inventory			557				256
Lease liability			266				305
Fixed assets			62				99
Warrant derivatives			—				3,061
Other			87				975
Total deferred tax assets			136,804				138,012
Less: valuation allowance			(136,552	)			(137,250	)
Deferred tax assets, net of valuation allowance			252				762
Deferred tax liabilities:
Intangibles			—				(563	)
ROU asset			(252	)			(199	)
Total deferred tax liabilities			(252	)			(762	)
Net deferred tax liabilities		$	—			$	—

 

The Company has recorded a valuation allowance of $136.6 million and $137.3 million as of  June 30, 2025, and 2024, respectively, to reserve its net DTAs. In assessing the realizability of DTAs, management considers whether it is more likely than not that some portion or all of the DTAs will not be realized. The ultimate realization of DTAs is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, carry back opportunities and tax planning strategies in making the assessment. The Company believes it is more likely than not that it will realize the benefits of these deductible differences, net of the valuation allowance provided.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company has no accrued interest related to its uncertain tax positions as they all relate to timing differences that would adjust the Company’s NOL, interest expense carryover or research and development credit carryover and therefore do not require recognition. As a result of these timing differences, as of  June 30, 2025, and 2024 the Company had gross unrecognized tax benefits related to uncertain tax positions of $0.5 million and $1.3 million, respectively. Changes in unrecognized benefits in any given year are recorded as a component of deferred tax expense.

 

A tabular roll-forward of the Company’s gross unrecognized tax benefit related to uncertain tax positions is below.

 

		June 30,
		2025				2024
		(in thousands)
Beginning balances		$	1,313			$	2,948
Decrease resulting from current period tax positions			(795	)			(1,996	)
Increase resulting from current period tax positions			—				361
Ending balances		$	518			$	1,313

 

The change in the Company’s gross unrecognized tax benefits relates to filed method changes with the IRS for the tax return year ending June 30, 2024. Additionally, certain of the Company’s acquired legal entities pre-acquisition tax years are subject to the same general statute of limitations, resulting in its tax years back to 2005 being subject to examination.

 

The income tax expense (benefit) allocated to continuing operations and discontinued operations for the years ended June 30, 2025, and 2024, were as follows:

 

		Year Ended June 30,
		2025				2024
		(in thousands)
Continuing operations income tax expense		$	437			$	2,142
Discontinued operations income tax benefit			(17	)			(374	)
Income tax expense		$	420			$	1,768

 

See Note 20 - Discontinued Operations for further detail on the Company’s discontinued operations related to the wind down and divestiture of its Consumer Health business.

 

The One Big Beautiful Bill Act

 

On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was enacted in the United States. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the TCJA, allowing for accelerated tax deductions for qualified property and research expenditures, and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in calendar year 2025 and others implemented through calendar year 2027. None of the provisions are expected to impact the realizability of the Company’s deferred tax assets and liabilities on the consolidated balance sheet as of June 30, 2025. However, because the OBBBA is a wide-reaching law, the Company is currently assessing its potential impact on its business, financial condition, results of operations and future plans and the Company plans to provide an update in future SEC filings once this assessment is complete. See Note 21 - Subsequent Events for further detail.