HARROW, INC. Income Taxes Disclosure

NOTE 16. INCOME TAXES

 

The Company is subject to taxation in the U.S., New Jersey, Tennessee, and various other states. All of the Company’s pre-tax income is generated in the U.S. The Company’s income tax provision consists of the following for the year ended December 31, 2025:

 

SCHEDULE OF PROVISION FOR INCOME TAXES

		2025
Current
Federal		$	2,206,000
State and Local			1,565,000
Foreign			-
Total current			3,771,000
Deferred
Federal			-
Foreign			-
State and Local			-
Total deferred			-
Income Tax Provision		$	3,771,000

 

A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income taxes to the income tax provision for the year ended December 31, 2025 is as follows:

 

SCHEDULE OF INCOME TAX RATE AND TAX PROVISION

		Year Ended December 31, 2025
		Amount				Percent
U.S. Federal Statutory Tax Rate		$	(287,000	)			21.00	%
State and Local Income Taxes, Net of Federal Income Tax Effect(1)			1,248,000				(91.23	)
Tax Credits
Research and Development Credits			(356,000	)			26.02
Changes in Valuation Allowances			(783,000	)			57.24
Nontaxable or Nondeductible Items
Executive Compensation Limitations			8,691,000				(635.31	)
Stock Compensation Windfalls			(6,979,000	)			510.16
Transaction Fees			1,774,000				(129.68	)
Incentive Stock Options			(81,000	)			5.92
Meals and Entertainment			531,000				(38.82	)
Other Permanent Adjustments			1,000				(0.07	)
Changes in Unrecognized Tax Benefits			(19,000	)			1.39
Other Adjustments
Return to Provision			31,000				(2.27	)
Effective Income Tax Rate		$	3,771,000				(275.66	)%

 

(1)

The state that contributed to the majority (greater than 50%) of the tax effect in this category was Tennessee for 2025.

 

 

 

A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income tax provision to the income tax provision for the years ended December 31, 2024 and 2023 is as follows:

 

SCHEDULE OF INCOME TAX RATE

		2024				2023
		December 31,
		2024				2023
U.S. federal statutory tax rate			21.00	%			21.00	%
State tax benefit, net			(2.49	)%			0.77	%
Rate change			1.87	%			(8.02	)%
Employee stock-based compensation			(8.61	)%			19.93	%
Excess Employee remuneration			(5.95	)%			(30.83	)%
Melt loan settlement			-	%			(4.52	)%
Other			1.71	%			2.97	%
Uncertain tax positions			0.09	%			(11.71	)%
Research and development tax credit			2.66	%			0.53	%
Provision-to-return true-ups			(0.75	)%			1.72	%
Other true-ups			(1.87	)%			(0.43	)%
Total			7.66	%			(8.59	)%
Change in valuation allowance			(8.59	)%			5.71	%
Effective income tax rate			(0.93	)%			(2.88	)%

 

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31, 2025 and 2024 are as follows:

 

SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

		2025				2024
Deferred tax assets
Net operating loss carryforwards		$	12,332,000			$	2,448,000
Interest expense limitation carryforwards			4,768,000				4,605,000
Capitalized research & experimentation			4,791,000				2,276,000
Amortization			2,870,000				1,753,000
Accrued chargebacks & returns			2,035,000				290,000
Stock compensation			1,313,000				1,523,000
Investment in Melt Pharmaceuticals			-				3,620,000
Accrued rebates			1,454,000				438,000
Lease liability			2,232,000				2,304,000
Accrued bonus			1,881,000				-
Obsolete inventory reserve			431,000				354,000
Accrued vacation			455,000				346,000
Research credit carryforwards			78,000				577,000
Other accruals and reserves			336,000				974,000
Total deferred tax assets			34,976,000				21,508,000
Valuation allowances			(29,247,000	)			(17,610,000	)
Net deferred tax assets			5,729,000				3,898,000
Deferred tax liabilities
Prepaid expenses			2,383,000				1,777,000
Tax accounting method change			1,347,000				-
Depreciation			23,000				-
Right-of-use assets			1,976,000				2,121,000
Total deferred tax liabilities			5,729,000				3,898,000
Net deferred tax liability		$	-			$	-

 

As of December 31, 2025, the Company had federal net operating loss carryforwards of approximately $37,124,000 which will be carried forward indefinitely and may be used to offset up to 80% of federal taxable income. During 2025, $36,069,000 federal net operating loss carryforwards were acquired from Melt Pharmaceuticals and are subject to a Section 382 limitation. In addition, the Company has state net operating loss carryforwards of $75,332,000, of which $74,546,000 will begin to expire in 2032 and the remainder will be carried forward indefinitely. During 2025, $49,302,000 of state net operating loss carryforwards were acquired from Melt Pharmaceuticals and are subject to Section 382 limitations. Additionally, the Company has state research and development credit carryforwards of $100,000.

 

Realization of deferred tax assets is dependent upon future taxable income, if any, the timing and amount of which are uncertain. Accordingly, a valuation allowance has been recorded for the amount of the net deferred tax assets. A rollforward of the valuation allowance is as follows:

 

SCHEDULE OF VALUATION ALLOWANCE

		2025				2024
Beginning balance		$	17,610,000			$	15,631,000
Increases to the valuation allowance			11,637,000				1,979,000
Decreases to the valuation allowance			-				-
Ending balance		$	29,247,000			$	17,610,000

 

During the year ended December 31, 2025, the Company did not pay any Federal income tax and paid $93,000 of state income taxes, as follows:

 

SCHEDULE OF STATE INCOME TAX PAID

Tennessee		$	57,000
Colorado			17,000
New Jersey			10,000
Massachusetts			8,000
Other			1,000
State income taxes paid		$	93,000

 

 

As of December 31, 2025 and 2024, the Company had approximately $307,000 and $2,858,000, respectively of unrecognized tax benefits which, if fully recognized, would decrease its effective tax rate. Interest or penalties of $13,000 and $69,000 were accrued relating to unrecognized tax benefits as of December 31, 2025 and 2024, respectively.

 

A reconciliation of the change in the unrecognized tax benefits balance for the years ended December 31, 2025 and 2024 is as follows:

 

SCHEDULE OF UNRECOGNIZED TAX BENEFITS

		2025				2024
Beginning balance		$	2,858,000			$	2,822,000
Additions for tax positions related to current year			101,000				5,000
Additions (reductions) for tax positions related to prior years			(2,522,000	)			32,000
Reductions to tax positions related to lapse of statute			(130,000	)			-
Ending balance		$	307,000			$	2,858,000