NOTE 13 – INCOME TAXES
The Company utilizes the liability method of accounting for income taxes and deferred taxes which are determined based on the differences between the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax laws. In assessing the realizability of the deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized through the generation of future taxable income. In making this determination, the Company assessed all of the evidence available at the time including recent earnings, forecasted income projections, and historical financial performance. The Company has fully reserved deferred tax assets as a result of this assessment.
The income tax expenses (benefits) from continuing operations are summarized as follows (these expenses (benefits) were included in Other income and expense in the Consolidated Statement of Operations):
|
|
2017 |
|
|
|
2016 |
|
||
|
Federal: |
|
|
|
|
|
|
|
|
|
Current |
$ |
- |
|
|
|
$ |
- |
|
|
Deferred |
|
- |
|
|
|
|
- |
|
|
|
|
- |
|
|
|
|
- |
|
|
State: |
|
|
|
|
|
|
|
|
|
Current |
|
(103 |
) |
|
|
|
- |
|
|
Deferred |
|
- |
|
|
|
|
- |
|
|
|
|
(103 |
) |
|
|
|
- |
|
|
Total |
$ |
(103 |
) |
|
|
$ |
- |
|
The provision for income taxes differs from income taxes computed at the federal statutory tax rates for the years ended December 31, 2017 and 2016, due to the following items:
|
|
2017 |
|
|
|
2016 |
|
|
||
|
Federal Statutory rate |
|
34.0 |
|
% |
|
|
34.0 |
|
% |
|
State income taxes, net of federal income tax benefit |
|
0.2 |
|
|
|
|
5.0 |
|
|
|
Bargain purchase gain |
|
15.9 |
|
|
|
|
- |
|
|
|
Transaction cost |
|
(2.3 |
) |
|
|
|
- |
|
|
|
Interest expense |
|
(2.3 |
) |
|
|
|
- |
|
|
|
Impact of change in fair value of tranche assets and liabilities |
|
0.2 |
|
|
|
|
(0.3 |
) |
|
|
Other permanent differences |
|
(0.2 |
) |
|
|
|
- |
|
|
|
Federal tax rate change |
|
(75.3 |
) |
|
|
|
- |
|
|
|
Change in valuation allowance |
|
28.0 |
|
|
|
|
(41.0 |
) |
|
|
Research and development tax credits |
|
3.3 |
|
|
|
|
2.2 |
|
|
|
Other |
|
(1.3 |
) |
|
|
|
0.1 |
|
|
|
Effective income tax rate |
|
0.2 |
|
% |
|
|
0.0 |
|
% |
On November 3, 2017, we completed our tax-free merger with Cempra. To reflect the opening balance sheet deferred tax assets and liabilities of Cempra, we recorded a net deferred tax asset of $107,688 offset with valuation allowance of $107,688. Under ASC 805, Business Combinations, we are required to recognize adjustments to provisional amounts during the measurement period as they are identified, and to recognize such adjustments retrospectively, as if the accounting for the business combination had been completed at the acquisition date. We will adjust the net deferred tax assets and valuation allowance during the remeasurement period, including any unrecognized tax positions. See Note 3 for further information regarding the merger.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but not limited to, a corporate tax decrease from 34% to 21% effective for tax years beginning after December 31, 2017, limitation of the business interest deduction, modification of the net operating loss deduction, reduction of the business tax credit for qualified clinical testing expenses for certain drugs for rare diseases or conditions, and acceleration of depreciation for certain assets placed into service after September 27, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record and provisional estimate in the financial statement.
We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing, and, as a result, have recorded $44,438 as an additional income tax expense offset with $44,438 tax benefit from the change in the valuation allowance in the fourth quarter of 2017, the period in which the legislation was enacted. The adjustments to deferred tax assets and liability are provisional amounts estimated based on information available as of December 31, 2017. We will recognize any changes to the provisional amounts as we refine our estimates of our cumulative temporary differences related to Cempra’s opening balance sheet from the Merger, in accordance with ASC 805.
The tax effects of the temporary differences and net operating losses that give rise to significant portions of deferred tax assets are as follows (in thousands):
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
$ |
172,481 |
|
|
$ |
106,826 |
|
|
Tax credit carryforwards |
|
24,924 |
|
|
|
7,386 |
|
|
Deferred revenue |
|
3,364 |
|
|
|
- |
|
|
Fixed assets |
|
593 |
|
|
|
1,051 |
|
|
Stock compensation expense |
|
2,503 |
|
|
|
2,406 |
|
|
Intangibles |
|
3,978 |
|
|
|
1,008 |
|
|
Others |
|
2,151 |
|
|
|
144 |
|
|
Total deferred tax assets |
|
209,994 |
|
|
|
118,821 |
|
|
Less valuation allowance |
|
(209,994 |
) |
|
|
(118,821 |
) |
|
Net deferred tax assets |
$ |
- |
|
|
$ |
- |
|
We have established a full valuation allowance because we do not believe that it is more likely than not that we will generate sufficient taxable income to realize the deferred tax assets and, therefore, not recognize any benefits from the net operating losses, tax credits, and other deferred tax assets. For the year ended December 31, 2017, our valuation allowance decreased by $16,515, excluding the deferred tax asset valuation allowance of $107,688 associated with the Cempra merger. Further adjusted for the decrease of $44,438 related to the Act, our deferred tax asset valuation allowance increased by $27,923 in 2017 compared to an increase of $30,341 in 2016.
We have determined that our ability to utilize our previously generated federal net operating losses and federal tax credits would be limited under Sections 382 and 383 of the Internal Revenue Code (“Section 382”). The limitations under Section 382 apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregated ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). We determined that it will be subject to Section 382 limitations due to previous ownership changes, specifically associated with our recapitalization in 2012. In addition, future changes in stock ownership may trigger additional ownership changes and, consequently, additional Section 382 limitations. As of the fourth quarter of 2017, we have begun performing a Section 382 analysis to determine the Section 382 limitations from previous ownership changes and from the merger. We will adjust our net deferred tax assets and corresponding valuation allowance in the quarter when the analysis is completed, which we expect will be the first quarter of 2018.
As of December 31, 2017, we had, on a tax-effected basis, approximately $23,218 in tax credit carryforwards and $149,879 of federal net operating loss carryforwards that are available to offset taxable income in the future. The tax credit carryforwards will begin to expire in 2021. The federal net operating loss carryforwards begin to expire in 2020. State net operating loss carryforwards and tax credit carryforwards, on a tax-effected basis and net of federal tax benefits, are $22,601 and $1,706, respectively. The state net operating loss carryforwards begin to expire in 2020.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. With few exceptions, the major jurisdictions subject to examination by the relevant taxable authorities, and open tax years, stated as the Company's fiscal years, are as follows:
|
Jurisdiction |
Open Tax Years |
|
U.S. Federal |
2014 - 2016 |
|
U.S. State |
2014 - 2016 |
ASC 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized.
As of December 31, 2017, we did not have any unrecognized tax benefits. To the extent penalties and interest would be assessed on any underpayment of income tax, our policy is that such amounts would be accrued and classified as a component of income tax expense in the financial statements. To date, we have not recorded any such interest or penalties.