| 10. | Income Taxes |
Due to the ongoing operating losses and the inability to recognize any income tax benefit, there is no provision for income taxes in any period presented in these financial statements. Since inception, the Company has only generated pretax losses.
The reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate of 34% to amounts included in the consolidated statements of operations is as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
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State tax |
3.5 | % | 3.4 | % | 3.6 | % | ||||||
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Valuation allowance |
26.5 | % | (44.7 | )% | (37.7 | )% | ||||||
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Federal rate change |
(73.2 | )% | 0.0 | % | 0.0 | % | ||||||
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Tax credit |
6.8 | % | 6.2 | % | 0.0 | % | ||||||
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Other |
2.4 | % | 1.1 | % | 0.1 | % | ||||||
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| 0.0 | % | 0.0 | % | 0.0 | % | |||||||
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Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 are as follows:
| 2017 | 2016 | |||||||
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Net operating loss |
$ | 15,718,570 | $ | 21,050,217 | ||||
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Start-up cost |
10,508,487 | 12,823,113 | ||||||
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Tax credits |
11,582,134 | 6,960,838 | ||||||
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Deferred compensation |
1,326,189 | 1,555,425 | ||||||
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Other |
72,395 | 207,133 | ||||||
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Gross deferred tax asset |
39,207,775 | 42,596,726 | ||||||
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Valuation allowance |
(39,207,775 | ) | (42,596,726 | ) | ||||
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Net deferred tax assets |
$ | 0 | $ | 0 | ||||
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The Company’s deferred tax assets have been fully offset by a valuation allowance at December 31, 2017 and 2016 because the Company believes that it is more likely than not that the deferred tax asset will not be realized. The decrease and increase in the valuation allowance on the deferred tax assets was $3,388,951 and $8,287,962 for the years ended December 31, 2017 and 2016, respectively.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. As a result of the reduction in the U.S. corporate tax rate from 35% to 21% under the Tax Act enacted in December 2017, the Company recorded a reduction of approximately $13.5 million in the fourth quarter of 2017 related to the revaluation of its deferred tax assets. There was no impact to tax expense as a result of the revaluation as the Company’s deferred tax assets have a full valuation allowance.
At December 31, 2017 and 2016, respectively, the Company had net operating loss carryforwards of approximately $62.6 million and $56.3 million available to reduce future taxable income, if any. The net operating loss carryforwards will expire at various dates beginning in 2024 and ending in 2037. If an ownership change, as defined under Internal Revenue Code Section 382, occurs, the use of these carry-forwards may be subject to limitation. The effective tax rate of 0% in all periods presented differs from the statutory rate of 34% due to the valuation allowance and because the Company had no taxable income.
Beginning in 2010, the Company has received several orphan drug designations by the FDA for products currently under development. The orphan drug designations allow the Company to claim increased federal tax credits for certain research and development activities.
No interest or penalties were accrued through December 31, 2017. The Company’s policy is to recognize any related interest or penalties in income tax expense. The Company is not subject to U.S federal, state and local tax examinations by tax authorities for any years before 2014. The Company is not currently under income tax examinations by any tax authorities.