Income Taxes
The components of the Company's net deferred tax assets at December 31 are as follows:
|
| | | | | | | | |
| | 2017 | | 2016 |
| | | | |
Deferred Tax Assets | | | | |
Net operating loss and tax credits | | $ | 15,295,547 |
| | $ | 3,881,415 |
|
Property and equipment and intangibles | | 232,667 |
| | 331,301 |
|
Allowance for accounts receivable | | 129,180 |
| | 170,733 |
|
Reserve for expired product | | 538,141 |
| | 771,034 |
|
Inventory | | 173,885 |
| | 214,654 |
|
Deferred charges | | 624,367 |
| | 738,541 |
|
Cumulative compensation costs incurred on deductible equity awards | | 793,206 |
| | 639,263 |
|
Total deferred tax assets | | 17,786,993 |
| | 6,746,941 |
|
| | | | |
Deferred Tax Liabilities | | | | |
Intangible assets | | (2,067,548 | ) | | (3,238,511 | ) |
Net deferred tax assets, before valuation allowance | | 15,719,445 |
| | 3,508,430 |
|
Less: deferred tax asset valuation allowance | | (15,632,235 | ) | | (388,500 | ) |
Net deferred tax assets | | $ | 87,210 |
| | $ | 3,119,930 |
|
The following table summarizes the amount and year of expiration of the Company's federal and state net operating loss carryforwards as of December 31, 2017:
|
| | | | | | | | |
Years of expiration | | Federal | | State |
| | | | |
2018 - 2019 | | $ | — |
| | $ | 238,047 |
|
2020 - 2028 | | — |
| | 38,858,730 |
|
2029 | | 44,153,819 |
| | 10,513,791 |
|
2030 - 2037 | | 7,365,668 |
| | 6,331,773 |
|
Total federal and state net operating loss carryforwards | | $ | 51,519,487 |
| | $ | 55,942,341 |
|
Income tax (expense) benefit includes the following components for the years ended December 31:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Current: | | | | | | |
Federal | | $ | — |
| | $ | 867,041 |
| | $ | (41,326 | ) |
State and other | | (59,243 | ) | | 83,463 |
| | (44,276 | ) |
Total current income tax (expense) benefit | | (59,243 | ) | | 950,504 |
| | (85,602 | ) |
| | | | | | |
Deferred: | | | | | | |
Federal | | (3,682,772 | ) | | (537,965 | ) | | (385,723 | ) |
State | | (432,874 | ) | | (81,615 | ) | | (104,504 | ) |
Total deferred income tax (expense) benefit | | (4,115,646 | ) | | (619,580 | ) | | (490,227 | ) |
Total income tax (expense) benefit | | $ | (4,174,889 | ) | | $ | 330,924 |
| | $ | (575,829 | ) |
The Company’s effective income tax rate for 2017, 2016 and 2015 reconciles with the federal statutory tax rate as follows:
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Federal tax expense at statutory rate | | 34 | % | | 34 | % | | 34 | % |
State income tax expense (net of federal income tax benefit) | | 4 | % | | 4 | % | | 4 | % |
Permanent differences associated with general business credits | | 1 | % | | 5 | % | | (3 | )% |
Change in valuation allowance | | (148 | )% | | (15 | )% | | 3 | % |
Change in tax rate | | 2 | % | | — | % | | — | % |
Other permanent differences | | 1 | % | | (2 | )% | | 7 | % |
Other | | (2 | )% | | (1 | )% | | 1 | % |
Net income tax expense | | (108 | )% | | 25 | % | | 46 | % |
In the first quarter of 2017, the Company adopted the Accounting Standards Update, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. As a result, the Company recorded the previously unrecognized net operating loss carryforwards generated from the exercise of nonqualified options of approximately $44.1 million. The Company recorded a net deferred tax asset of $1.1 million through retained earnings as a result of the adoption of this accounting standard. This $1.1 million in net non-current deferred tax assets represents a deferred tax asset of $17.0 million, net of a related valuation allowance of $15.9 million.
During the year, the Company determined that it was not more likely than not that its net deferred tax assets would be realized. As such, it recorded a full valuation allowance against net deferred tax assets in the second quarter ended June 30, 2017. The Company’s position is unchanged as of December 31, 2017 with the exception of one deferred tax asset for alternative minimum tax (“AMT”) credit carryforwards discussed further below.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21%; (2) eliminating the corporate AMT and changing how AMT credits can be realized; (3) capital expensing; and (4) creating new limitations on deductible interest expense and executive compensation.
The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance 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. 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 a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our analysis of the impact of the Tax Act, we have recorded a net tax benefit of $0.1 million in the year ended December 31, 2017. This net tax benefit consists entirely of the release of the valuation allowance against AMT credits that will be realizable under the Tax Act in future periods. While the Company does not expect to record further amounts related to the Tax Act, we will continue to evaluate additional guidance as it is released by the Internal Revenue Service and will record additional amounts if needed.
The Company expects it will continue to pay minimal taxes in future periods through the continued utilization of net operating loss carryforwards, as it is able to achieve taxable income through its operations.
Federal tax years that remain open to examination are 2011 through 2016. Due to a 2009 net operating loss carryback, federal tax years 2006 through 2008 remain open to the extent of net operating losses utilized in those years. During 2012, the 2009 federal tax return was examined by the Internal Revenue Service with no significant findings or adjustments. State tax years that remain open to examination are 2010 to 2016. The Company has no unrecognized tax benefits in 2017, 2016 and 2015.