DNA X, Inc. Income Taxes Disclosure

NOTE 8—Income Taxes

  

The following table presents the income (loss) before income taxes for domestic and foreign operations (in thousands):

 

Schedule of Income loss Before Income Taxes for Domestic and Foreign Operations

		2025				2024
Domestic loss		$	(7,955	)		$	(2,883	)
Foreign subsidiaries income			—				—
Income (loss) before income taxes from continuing operations		$	(7,955	)		$	(2,883	)

 

 

Schedule of Net Income Loss From Continuing and Discontinuing Operations

Continuing operations		2025
Loss from continuing operations before income taxes		$	(7,955	)
Income taxes			—
Loss from continuing operations		$	(7,955	)

 

Discontinued operations
Loss from discontinued operations before income taxes		$	(13,848	)
Income taxes			1,146
Loss from discontinued operations		$	(12,702	)
Net loss		$	(20,657	)

 

Schedule of Income Tax Expense Benefit

		2025				2024				Continuing Operations 2025				Discontinued Operations 2025
Current income tax expense:
Federal		$	—			$	1			$	—			$	—
State			(13	)			12				—				(13	)
Foreign			296				222				—				296
Total Current			283				236				—				283
Deferred income tax expense (benefit):
Federal			(1,970	)							—				(1,970	)
State			(48	)							—				(48	)
Foreign			589				(10	)			—				589
Total Deferred			(1,429	)			(10	)			—				(1,429	)
Total provision for income taxes		$	(1,146	)		$	226			$	—			$	(1,146	)

 

The Company’s effective tax rate differs from the federal statutory rate due to the following (in thousands):

 Schedule of Effective Income Tax 

						Continuing Operations
		2024				2024
Statutory federal income tax rate			21.00	%			21.00	%
State income taxes, net of federal tax benefits			0.41	%			—	%
Stock compensation			-0.66	%			—	%
Change in assertion – permanent reinvestment			0.00	%			—	%
Foreign rate differential			-0.24	%			—	%
Tax Credits			0.00	%			—	%
GILTI Inclusion			-0.37	%			—	%
Adjustment to Section 382 Limit Tax Carryovers			0.00	%			—	%
Non-deductible expenses			-0.06	%			—	%
Valuation allowance			-20.73	%			-21.00	%
Other			0.00	%			—	%
Effective tax rate			0.68	%			—	%

 

 

		2025 Continuing Operations
		In thousands				Percent
Tax at federal statutory rate		$	( 1,670	)			21.00	%
State income taxes, net of federal tax benefit			—				—	%
Foreign tax effects			—				—
India			—				—
Change in assertion – permanent reinvestment			—				—	%
Other			—				—	%
Other foreign jurisdictions			—				—	%
Effect of change in tax laws or rates in current year			—				—	%
Effect of cross-border tax laws - GILTI			—				—	%
Tax credits			—				—	%
Change in valuation allowance			1,670				-21.00	%
Nontaxable or nondeductible items
Section 382 change in control limits			—				—	%
Other			—				—	%
Changes in unrecognized tax benefits			—				—	%
Provision (benefit) for income taxes		$	—				—	%

 

Net cash paid (refunds received) for income taxes consisted of the following:

  Schedule Of Income Tax Net Cash Paid

		2025
Federal		$	—
State and local jurisdictions
CA			1
NJ			1
TX			22
Foreign
China			89
India			35
Total Net cash paid for income taxes		$	148

 

 

Deferred income taxes 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. The following table presents the significant components of the Company’s deferred tax assets and liabilities at December 31 (in thousands):

 Schedule of Components of the Company’s Deferred Tax Assets and Liabilities 

		2025				2024
Gross deferred tax assets:
Net operating loss carryforward		$	2,693			$	25,379
Section 174 capitalized costs			3,747				3,443
R&D tax credits			—				102
Accruals and reserves			2,102				2,519
Capitalized transaction costs			53				—
Section 163(j) interest expense carryover			156				284
Stock compensation			110				125
Alternative minimum tax credits			—				21
Total gross deferred tax assets			8,861				31,873
Less: valuation allowance			(4,270	)			(30,271	)
Total deferred tax assets net of valuation allowance			4,591				1,602
Deferred tax liabilities:
Deferred commissions			(2,495	)			(1,440	)
Property and equipment			(55	)			(97	)
Future repatriation of foreign earnings			(600	)			—
Net deferred tax assets		$	1,441			$	65

 

A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. The Company entered into an asset purchase agreement in January 2026, generating both a book and a tax gain on the sale of assets. The Company has scheduled out the potential utilization of deferred tax assets in the 2026 year resulting from the gain on the asset sale and expected loss from operation in 2026. Based on this scheduling, the Company is recognizing approximately $2 million of U.S. federal and state deferred tax assets at December 31, 2025. The tax benefit from recognizing the deferred tax assets is netted with the loss from discontinued operations in 2025.

 

At December 31, 2025, the Company had net deferred income tax assets related primarily to capitalized R&D costs, net operating loss carryforwards and accruals and reserves of $5.5 million of which $4.1 million have been offset by a valuation allowance.

 

We have not provided U.S. Federal and State income taxes, nor foreign withholding taxes on approximately $7.0 million of undistributed earnings for certain non-US subsidiaries in China, because such earnings are intended to be indefinitely reinvested. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would not be subject to U.S. income tax due to the transition tax of IRC Section 965 or via the newly enacted Global Intangible Low-Taxed Income (“GILTI”) provision, enacted as part of the 2017 U.S. Tax Act. The Company would be subject to U.S. state tax and potential foreign withholding taxes on a repatriation of the foreign earnings. As of December 31, 2025, the Company does not assert permanent reinvestment of its earnings in India. The Company recognized $600 of tax expense in 2025 related to this change in assertion of the India cumulative earnings.

 

Estimate of cumulative foreign earnings is as follows as of December 31, 2025:

 Schedule of Cumulative Foreign Earnings

		2025				2024
China		$	6,966			$	6,694
India			—				5,309
Total		$	6,966			$	12,003

 

The Company had net operating loss carryovers as follows as of December 31 (in thousands):

 Summary of Operating Loss Carryforwards 

		2025				California				Other
Federal NOL		$	12,697				-				-
State NOL		$	751			$	771			$	29

 

 

Net operating loss carryforwards are available to offset future federal and state taxable income. Federal and state net operating loss carryforwards begin to expire in 2037 and 2035, respectively. The net operating losses have annual Section 382 limitations.

 

The Company had research and development (“R&D”) credit carryforwards as follows as of December 31:

 Summary of Tax Credit Carryforwards

		2025				Tax Return				FIN 48
Federal R&D credits		$	—			$	—			$	—
California R&D credits		$	—			$	—			$	—

 

Federal and state laws impose restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of a change in ownership of the Company, which constitutes an ‘ownership change’ as defined by Internal Revenue Code Section 382 and 383. The Company experienced an ownership change in July 2025 that materially impacts the availability of its net operating losses and tax credits. The amounts indicated in the above tables reflect the reduction of net operating losses and credit carryforwards as a result of previous ownership changes that the Company experienced. Should there be additional ownership changes in the future, the Company’s ability to utilize existing carryforwards could be substantially restricted.

 

The Company had excess interest expense carryforwards of $743 as of December 31, 2025. Federal laws impose restrictions on the utilization of Section 163(j) excess interest expense carryforwards in the event of a change in ownership of the Company, which constitutes an ‘ownership change’ as defined by Internal Revenue Code Section 382 and 383. The Company experienced an ownership change in July 2022 that materially impacts the availability of its excess interest expense. However, since the Section 163(j) excess interest expense carryover does not expire, there will be no limitation under Section 382 against the excess interest expense carryover in 2025. Should the Company utilize the excess interest expense in the future, the availability of its carryforwards would be substantially restricted.

 

Uncertain Tax Positions

 

The Company accounts for uncertainty in income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, uncertain tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize, in the consolidated financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

 

The following table summarizes the activity related to unrecognized tax benefits as follows as of December 31:

 Schedule of Unrecognized Tax Benefits

		2025				2024
Unrecognized benefit-beginning of period		$	1,473			$	1,274
Gross increases-prior period tax positions			—				153
Gross (decreases)-prior period tax positions			(34	)			—
Gross (decreases)-current period tax positions			68				46
Unrecognized benefit-end of period		$	1,507			$	1,473

 

All $1,507 of the unrecognized tax benefits would affect the Company’s effective tax rate, if recognized.

 

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. The Company reported a tax expense of $46 of interest and penalties in 2024 and the Company has accrued a liability of $306 for accrued interest and penalties related to unrecognized tax benefit as of December 31, 2025.

 

The Company’s material income tax jurisdictions are the United States (federal and California), China and India. As a result of net operating loss and credit carryforwards, the Company is subject to audit for tax years 2014 and forward for California purposes and for 2020 and forward for federal tax purposes. The China and India tax years are open under the statute of limitations from 2020 and forward.

 

 

Accounting for GILTI requires companies to adopt tax accounting policies related to:

 

Treating the book-tax differences as either period costs or to recognize GILTI related deferred tax assets/liabilities in accounting for the GILTI book-tax differences. The Company has elected to treat this difference as a period cost.

 

In the Company’s valuation allowance analysis, the Company will elect the Increment Cash Tax Savings Approach in determining its U.S. valuation allowance.