The Company has no income tax expense due to operating losses incurred for the years ended December 31, 2017 and 2016. Approximately $62,000 in non-qualified stock options were cancelled during 2017 due to terminations that resulted in a reversal of the deferred tax asset of approximately $16,000. The cancellations did not result in a book income for December 31, 2017.
The effects of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2017 and 2016 are as follows:
| | | For the years ended | |
| | | December 31, | |
| | | 2017 | | 2016 | |
| Deferred tax assets: | | | | | | | |
| Net operating loss carryforward | | $ | 13,653,000 | | $ | 10,934,000 | |
| Stock-based compensation | | | 2,231,000 | | | 2,066,000 | |
| License agreements | | | 493,000 | | | 490,000 | |
| Research and development | | | 117,000 | | | 117,000 | |
| Technology licensing fee | | | 185,000 | | | 185,000 | |
| Valuation allowance | | | (16,679,000) | | | (13,792,000) | |
| Deferred tax assets, net of valuation allowance | | $ | - | | $ | - | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain of these changes may be applicable to the Company, including but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, creating a new limitation on deductible interest expense, eliminating the corporate alternative minimum tax (“AMT”), modifying the rules related to uses and limitations of net operating loss carryforwards generated in tax years ending after December 31, 2017, and changing the rules pertaining to the taxation of profits earned abroad. Changes in tax rates and tax laws are accounted for in the period of enactment. The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018.
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established. Based upon the history of losses, management believes that it is more likely than not that future benefits of deferred tax assets will not be realized and has established a full valuation allowance for the years ended December 31, 2017 and 2016. Consequently, the deferred tax asset valuation allowance increased by $2.9 million as of December 31, 2017. The Company has research and development tax credit carryforwards of $117,000 to offset future federal income taxes. The research and development tax credit carryforwards begin to expire in 2029.
The Company has approximately $41.7 million of federal and $21.9 million of state Net Operating Loss (“NOL”s) that may be available to offset future taxable income, if any. The federal net operating loss carryforwards, if not utilized, will expire between 2029 and 2037. The state net operating loss carryforwards, if not utilized, will expire in 2037.
In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating loss carryforwards may be limited in the event of a change in ownership. A full Section 382 analysis has not been prepared and NOLs could be subject to limitation under Section 382.
For the years ended December 31, 2017 and 2016, the expected tax expense (benefit) based on the U. S. federal statutory rate is reconciled with the actual tax provision (benefit) as follows:
| | | For the years ended | |
| | | December 31, | |
| | | 2017 | | 2016 | |
| U. S. federal statutory rate | | $ | (3,734,000) | | $ | (835,000) | |
| State taxes, net of federal benefit | | | (414,000) | | | (286,000) | |
| Federal tax rate change | | | 1,401,000 | | | - | |
| | | | | | | | |
| Permanent differences | | | | | | | |
| - Change in fair value of derivative liabilities | | | (2,000) | | | (2,019,000) | |
| - Other permanent differences | | | (161,000) | | | 46,000 | |
| Change in valuation allowance | | | 2,890,000 | | | 2,966,000 | |
| Other | | | 20,000 | | | 128,000 | |
| Income tax provision (benefit) | | $ | - | | $ | - | |
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a 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. As of December 31, 2017 and 2016, there were no unrecognized tax benefits. The Company recognizes accrued interest and penalties as income tax expense. No amounts were accrued for the payment of interest and penalties at December 31, 2017 and 2016. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position in the next year.
Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our recorded deferred tax liabilities and the one-time transition tax. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
A reconciliation of the Company’s effective tax rate to the statutory U.S. federal rate is as follows:
| | | For the years ended | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
| U. S. federal statutory rate | | | (34.0) | % | | | (34.0) | % |
| State taxes, net of federal benefit | | | (3.6) | % | | | (11.6) | % |
| Federal tax rate change | | | 12.3 | % | | | 0.0 | % |
| | | | | | | | | |
| Permanent differences | | | | | | | | |
| - Change in fair value of derivative liabilities | | | (0.0) | % | | | (82.2) | % |
| - Other permanent differences | | | (1.5) | % | | | 1.9 | % |
| Change in valuation allowance | | | 26.3 | % | | | 120.8 | % |
| Other | | | 0.5 | % | | | 5.2 | % |
| Income tax provision (benefit) | | | (0.0) | % | | | 0.0 | % |