NOTE 9. INCOME TAXES

 

Net deferred tax assets (liabilities) are summarized as follows (in thousands):

 

		As of December 31,
		2017			2016
Deferred income tax asset:
Net operating loss carry forward		$	33,300		$	23,912
Stock-based compensation			4,568			9,562
Tax credit carryforwards			9,323			8,167
Reserves and accruals			733			139
Deferred tax asssets before valuation allowance			47,924			41,780
Less: valuation allowance			(47,849)			(41,402)
Net deferred income tax assets			75			378
Deferred tax liabilities:
Depreciation and amortization			(75)			(378)
Net deferred tax assets (liabilities)		$	-		$	-

 

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: 

 

		Years ended December 31,
		2017			2016			2015
Federal statutory tax rate			(34)	%		(34)	%		(34)	%
Orphan Drug &; Research credits			0			(8)			(12)
Permanent and other differences			4			4			10
Tax rate change			23			-			-
State tax, net of federal benefit			-			(4)			(5)
			(7)	%		(42)	%		(41)	%
Valuation allowance			7	%		42	%		41	%
Effective tax rate			-	%		-	%		-	%

 

The components of income tax expense (benefit) are as follows (in thousands):

 

		Years ended December 31,
		2017			2016			2015
Federal:
Current		$	-		$	-		$	-
Deferred			(7,391)			(19,050)			(9,724)
State and Local
Current			-			-			-
Deferred			944			(3,007)			(1,887)
Change in Valuation Allowance			6,447			22,057			11,611
Total income tax expense (benefit)		$	-		$	-		$	-

 

The Company had net operating loss carryovers (“NOLs”) for federal and state income tax purposes of approximately $143.3 million and $66.3 million, respectively, as of December 31, 2017. The federal NOLs will expire beginning in 2027 through 2037.  The state NOLs will expire if unused in years 2030 through 2037.

 

The Company’s utilization of NOLs is subject to an annual limitation due to ownership changes that have occurred previously or that could occur in the future as provided in Section 382 of the IRC (“Section 382”), as well as similar state provisions. Section 382 limits the utilization of NOLs when there is a greater than 50% change of ownership as determined under the regulations. Since its formation, the Company has raised capital through the issuance of capital stock and various convertible instruments which, combined with the purchasing shareholders’ subsequent disposition of these shares, has resulted in an ownership change as defined by Section 382, and could result in an ownership change in the future upon subsequent disposition.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its 2017 year-end income tax provision with its best estimate of the impact of the Act in accordance with its understanding of the Act and guidance available as of the date of this filing. The tax rate decrease resulted in a reduction of $20.8 million in the Company’s deferred tax assets, and a corresponding decrease of the same amount in the valuation allowance against these deferred tax assets.

 

 

The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other Income (Expense)” in the consolidated statement of operations. Penalties would be recognized as a component of “General and Administrative Expenses” in the consolidated statement of operations.