|
9. |
INCOME TAXES |
There was no provision for income taxes for the years ended December 31, 2017, and 2016, due to the Company’s operating losses and a full valuation allowance on deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
$ |
1,843,000 |
|
|
$ |
537,000 |
|
|
Capitalized research and development costs |
|
|
12,177,000 |
|
|
|
2,532,000 |
|
|
Accrued liabilities |
|
|
25,000 |
|
|
|
15,000 |
|
|
Tax credit carryforwards |
|
|
3,286,000 |
|
|
|
1,683,000 |
|
|
Stock-based compensation |
|
|
116,000 |
|
|
|
38,000 |
|
|
Total deferred tax assets |
|
|
17,447,000 |
|
|
|
4,805,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(17,444,000 |
) |
|
|
(4,805,000 |
) |
|
Net deferred tax assets |
|
|
3,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(3,000 |
) |
|
|
— |
|
|
|
|
$ |
— |
|
|
$ |
— |
|
A reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
R&D and Orphan drug credits |
|
|
7.6 |
% |
|
|
15.8 |
% |
|
State income tax, net of federal tax benefit |
|
|
-0.2 |
% |
|
|
-17.7 |
% |
|
Valuation allowance |
|
|
18.2 |
% |
|
|
137.1 |
% |
|
Reduction in tax attributed related to deconsolidation of subsidiary |
|
|
0.0 |
% |
|
|
-169.0 |
% |
|
Tax reform impact |
|
|
-57.8 |
% |
|
|
0.0 |
% |
|
Other, net |
|
|
-1.8 |
% |
|
|
-0.2 |
% |
|
Effective tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
The increase in deferred tax assets in 2017 is a result of the Merger (see Note 3). Management currently believes that it is more likely than not that the deferred tax assets relating to the loss carryforwards and other temporary differences will not be realized in the future. Through December 31, 2017, for income tax reporting purposes, the Company had U.S. Federal and state net operating loss carryforwards of approximately $8.4 million (corresponding to $1.8 million on a tax effected basis in the table above), that can be carried forward and offset against taxable income. Federal and Massachusetts net operating losses can be carried forward for 20 years and begin to expire in 2024. Utilization of net operating losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization.
On December 22, 2017, The Tax Cuts and Jobs Act (the “Act”) was enacted. The Act significantly revised the U.S. corporate income tax law by lowering the corporate Federal income tax rate from 35% to 21%. As of December 31, 2017, the Company has assessed the effects of the corporate rate reduction on its existing deferred tax balances which resulted in a $8.2 million reduction in the deferred tax assets. Since the Company maintains a full valuation allowance on its deferred tax assets, a corresponding reduction in the valuation allowance equal to the effect of the rate reduction on the ending deferred tax asset was also reflected. In addition to the rate reduction, the Act also requires companies with foreign subsidiaries to pay a one-time transition tax on earnings that were previously tax deferred. As of December 31, 2017, the Company does not maintain any foreign subsidiaries and does not have previously deferred foreign earnings subject to the transition tax.