NOTE 9 — INCOME TAXES
The provision for federal, foreign and state income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:
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Years ended December 31, |
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2017 |
|
|
2016(1) |
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|
2015(1) |
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|
Current income tax provision (benefit) |
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|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deferred income tax provision (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(9,376,272 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total income tax provision (benefit) |
|
$ |
(9,376,272 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
|
(1) |
There was no tax provision for income taxes for the year ended December 31, 2016 and 2015 due to losses. |
Net deferred tax assets (liabilities) as of December 31, 2017 and 2016 consist of the following:
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|
December 31, |
|
|
December 31, |
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|
|
|
2017 |
|
|
2016 |
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|
Deferred tax assets: |
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|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
18,265,530 |
|
|
$ |
20,213,845 |
|
|
Research and development tax credits |
|
|
145,115 |
|
|
|
145,115 |
|
|
Capitalized research and development costs |
|
|
14,858,509 |
|
|
|
16,413,906 |
|
|
Stock-based compensation |
|
|
4,180,651 |
|
|
|
4,741,558 |
|
|
Deferred start-up and license costs |
|
|
6,532,419 |
|
|
|
10,258,431 |
|
|
Deferred Revenue |
|
|
3,053,174 |
|
|
|
— |
|
|
Other |
|
|
129,082 |
|
|
|
— |
|
|
Net deferred tax assets |
|
|
47,164,480 |
|
|
|
51,772,855 |
|
|
Valuation allowance |
|
|
(41,878,528 |
) |
|
|
(51,772,855 |
) |
|
Net deferred tax assets |
|
$ |
5,285,952 |
|
|
$ |
— |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
In-process research and development |
|
$ |
(9,343,440 |
) |
|
$ |
(13,433,760 |
) |
|
Net deferred tax liabilities |
|
|
(4,057,488 |
) |
|
|
(13,433,760 |
) |
A reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31, 2017, 2016 and 2015 are as follows:
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|
Years ended December 31, |
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
Federal statutory rate |
|
|
(34.00 |
%) |
|
|
(34.00 |
%) |
|
|
(34.00 |
%) |
|
Permanent differences |
|
|
0.66 |
% |
|
|
0.76 |
% |
|
|
0.53 |
% |
|
State income taxes |
|
|
0.00 |
% |
|
|
(5.16 |
%) |
|
|
(5.20 |
%) |
|
Valuation allowance |
|
|
56.33 |
% |
|
|
38.40 |
% |
|
|
38.67 |
% |
|
Effective tax rate |
|
|
22.99 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical losses and the uncertainty of future taxable income over the periods which the Company will realize the benefits of its net deferred tax assets, management believes it is more likely than not that the Company will not realize the benefits on the balance of its net deferred tax asset and, accordingly, the Company has established a full valuation allowance on its net deferred tax assets. The valuation allowance decreased by approximately $9.9 million and increased by $11.9 million during the years ended December 31, 2017 and 2016.
As of December 31, 2017, the Company had approximately $64.8 million of Federal net operating losses that will begin to expire in 2027. As of December 31, 2017, the Company's wholly owned subsidiary had approximately $4.9 million of operating losses in Swizterland that will begin to expire in 2018. As of December 31, 2017, the Company had approximately $7.8 million of New Jersey and approximately $48.5 million of Massachusetts operating losses that will begin to expire in 2029 and 2033 respectively. As of December 31, 2017, the Company had approximately $0.2 million of federal research and development credits that will begin to expire in 2027. The Internal Revenue Code ("IRC") limits the amounts of net operating loss carryforwards that a company may use in any one year in the event of certain cumulative changes in ownership over a three-year period as described in Section 382 of the IRS. The Company has not performed a detailed analysis to determine whether an ownership change has occurred as of December 31, 2017.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”), resulting in significant modifications to existing law. The Company has completed the accounting for the effects of the Act during 2017. The Company’s financial statements for the year ended December 31, 2017, reflect the effects of the Act which includes a reduction in the corporate tax rate from 34% to 21%. Accordingly, the Company’s deferred tax assets and liabilities were revalued at the newly enacted rates expected to be effective in 2018 and forward; the reduction in federal rate from 34% to 21% resulted in no impact to total income tax expense. In addition to the federal rate change impact, the Company accounted for the impact of legislation on the timing of deferred tax positions and overall financial statement presentation, resulting in a total income tax benefit of $9.4 million related to future implications of indefinite lived deferred tax positions.
This legislative change regarding the carryforward period of net operating losses impacts the Company’s indefinite lived deferred tax liabilities related to its IPR&D intangibles. Prior to the change in tax law, the Company’s net operating losses could not be used to offset deferred tax liabilities resulting from taxable temporary differences with an indefinite life. After the legislative change, federal net operating loss incurred after December 31, 2017 will have an indefinite life. As a result, the Company’s deductible temporary differences will reverse and create unlimited lived deferred tax assets which may be available to offset indefinite lived deferred tax liabilities. Accordingly, the Company has recognized a tax benefit for the period ending December 31, 2017 to reflect this reversal pattern.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2012 to the present.
As of December 31, 2017 and 2016, the Company had no liability recorded for unrecognized tax benefits. The Company classifies penalties and interest expense related to income tax liabilities as an income tax expense. There were no interest and penalties recognized in the statements of operations for the years ended December 31, 2017, 2016 and 2015, or accrued on the balance sheets as of December 31, 2017 and 2016.