11. Income Taxes

 

The Company provides for income taxes under ASC 740. Under ASC 740, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company’s loss before income taxes was $16,799,053 and $16,998,638 for the years ended June 30, 2017 and 2016, respectively, and was generated entirely in the United States and Canada.

 

The income tax benefit for the year ended June 30, 2017 consist of state income tax benefits of $1.9 million from the sale of New Jersey net operating losses.

 

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following:

 

 

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses since inception, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of June 30, 2017 and June 30, 2016. The Company has recorded a net deferred tax liability of $1,269,600 related to in-process research and development as a result of the acquisition of Ciclofilin. It is the Company’s position that the acquired in-process research and development is an indefinite-lived intangible asset and is not available as a source of income to support the realization of deferred tax assets.

 

The valuation allowance increased by $6.5 million and $8.3 million for the years ended June 30, 2017 and 2016 due primarily to the generation of net operating losses during the periods.

 

A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:

 

 

As of June 30, 2017 and June 30, 2016, the Company had U.S. federal and state net operating loss carryforwards of $77.0 million and $33.3 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in June 2034. As of June 30, 2017 and June 30, 2016, the Company also had foreign net operating loss carryforwards of $2.1 and $0.7, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in June 2034.  The Company also had federal and state research and development tax credit carry forwards of approximately $0.5 million as of June 30, 2017, which will begin to expire begins to expire in June 2037.

 

Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The utilization of these NOLs is subject to limitations based on past and future changes in ownership of the Company pursuant to Section 382. Although the detailed study of Sec. 382 has not been completed, it is more likely than not that an ownership change under Sec. 382 has not occurred through the Series A and Series B Preferred Stock Issuances.

 

The Company files income tax returns in the United States, Canada and various state jurisdictions. The Company’s federal and state income tax returns from the year of incorporation, 2013, and forward remain subject to examination by the IRS and state authorities.

 

The Company had no unrecognized tax benefits or related interest and penalties accrued through June 30, 2017.