Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred taxes are determined by calculating the future tax consequences attributable to differences between the financial accounting and tax bases of existing assets and liabilities. A valuation allowance is recorded against deferred tax assets when, in the opinion of management, it is more likely than not that the Company will not be able to realize the benefit from its deferred tax assets.
The Company files income tax returns, as prescribed by the national, state and local jurisdictions in which it operates. The Company’s uncertain tax positions are related to tax years that remain subject to examination and are recognized in the financial statements when the recognition threshold and measurement attributes are met. Interest and penalties related to tax deficiencies and uncertain tax positions are recorded as income tax expense.
Income (Loss) from continuing operations consists of the following:
|
| | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 |
US operations | $ | (9,315,082 | ) | | $ | (2,010,415 | ) |
Foreign operations | (527,590 | ) | | (579,644 | ) |
| $ | (9,842,672 | ) | | $ | (2,590,059 | ) |
The provision for income taxes charged to continuing operations is $0 for all periods presented.
Deferred tax assets (liabilities) were comprised of the following as of the periods presented below:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Operating loss carryforwards | $ | 34,427,000 |
| | $ | 50,687,000 |
|
Accrued expenses | 5,969,000 |
| | 8,781,000 |
|
Tax credit carryforwards | 3,864,000 |
| | 3,747,000 |
|
Intellectual property | 3,878,000 |
| | 4,097,000 |
|
Equipment | 150,000 |
| | 283,000 |
|
Total deferred tax assets | 48,288,000 |
| | 67,595,000 |
|
Deferred tax liabilities: | — |
| | — |
|
Net deferred tax asset | 48,288,000 |
| | 67,595,000 |
|
Valuation allowance | (48,288,000 | ) | | (67,595,000 | ) |
| $ | — |
| | $ | — |
|
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to the pretax loss from continuing operations as a result of the following differences:
|
| | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 |
Tax at the U.S. statutory rate | $ | (3,347,000 | ) | | $ | (881,000 | ) |
Change in value of warrant liability | 1,505,000 |
| | (1,054,000 | ) |
Valuation allowance | 1,841,000 |
| | 1,933,000 |
|
Other | 1,000 |
| | 2,000 |
|
| $ | — |
| | $ | — |
|
At December 31, 2017, the Company had U.S. federal net operating loss carryforwards of approximately $139.7 million, which begin to expire if not utilized by 2023, and approximately $4,046,000 of tax credit carryforwards which begin to expire if not utilized by 2024. The Company also has state net operating loss carryforwards of approximately $84.2 million, which begin to expire if not utilized by 2027 and state tax credit carryforwards of approximately $311,000, which begin to expire if not utilized by 2022. The purchase of 6,459,948 shares of common stock by Mr. Davidovich on July 9, 2015 resulted in Mr. Davidovich owning 60.2% of the Company, at that time. We therefore believe it highly likely that this transaction will be viewed by the U.S. Internal Revenue Service as a change of ownership as defined by Section 382 of the Internal Revenue Code. Consequently, our ability to utilize approximately $124.8 million of U.S. federal net operating loss carryforwards, $3.65 million of U.S. tax credit carryforwards, approximately $73.4 million of state net operating loss carryforwards, and $324,000 of state tax credit carryforwards, all of which occurred prior to July 9, 2015, are limited. As such, a significant portion of these carryforwards will likely expire before they can be utilized, even if the Company is able to generate taxable income that, except for this transaction, would have been sufficient to fully utilize these carryforwards.
The Company files U.S. federal income tax returns, along with various state and foreign income tax returns. All federal, state and foreign tax returns for the years ended December 31, 2016, 2015 and 2014 are still open for examination.
The following presents a roll-forward of the unrecognized tax benefits and the associated interest and penalties:
|
| | | | | | | |
| Unrecognized Tax Benefits | | Interest and Penalties |
Balance at January 1, 2016 | $ | 468,000 |
| | $ | — |
|
Prior year tax position | — |
| | — |
|
Current year tax position | — |
| | — |
|
Deferred tax position | 14,000 |
| | — |
|
Settlements with tax authorities | — |
| | — |
|
Expiration of the statute of limitations | — |
| | — |
|
Balance at December 31, 2016 | 482,000 |
| | — |
|
Prior year tax position | — |
| | — |
|
Current year tax position | — |
| | — |
|
Deferred tax position | 11,000 |
| | — |
|
Settlements with tax authorities | — |
| | — |
|
Expiration of the statute of limitations | — |
| | — |
|
Balance at December 31, 2017 | $ | 493,000 |
| | $ | — |
|
CBLI claimed New York State incentive tax credit refunds of $48,000 and $60,000 during 2017 and 2016, respectively. These refundable tax credits were based on the Company’s research and development activities, real estate tax payments, employment levels and equipment purchases. Since there is no state tax liability or refund of prior year tax payments, these refundable tax credits were recorded against operating expenses in the year of receipt, instead of being recorded as an income tax benefit.
The U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act") on December 22, 2017, which made several changes to U.S. tax laws that could have a significant impact on the Company. Most of these provisions are effective for tax years beginning after December 31, 2017, and include, but are not limited to, (1) a reduction in the corporate tax rate from 34% to 21%, (2) limitations on the utilization of operating loss carryforwards, (3) limitations on the utilization of interest deductions, (4) requiring a one-time transition tax on undistributed earnings of foreign subsidiaries, (5) elimination of U.S. taxes on dividends received from foreign subsidiaries, (6) implementing a base erosion tax, and (7) implementing a new provision designed to tax currently in the U.S. global intangible low-taxed income ("GILTI") of foreign subsidiaries.
U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Accordingly, the Company's deferred tax assets were reduced by approximately $21.5 million to reflect the lower tax rate that will apply going forward, however, there was no income tax expense given the existence of a full valuation allowance recorded against the deferred tax assets.
None of the Company's foreign subsidiaries have undistributed earnings, so there is no impact associated with the one-time transition tax. Going forward, a tax liability could exist under the new GILTI provisions, but that will not apply until the foreign subsidiaries begin to generate income. The timing and amount of income to be generated by the foreign subsidiaries, and the impact of the new GILTI provision is impossible to estimate at this time, and therefore, no impact has been recorded.