Note 11 - Income Taxes
On December 22, 2017, the United States enacted new tax legislation, the Tax Cuts and Jobs Act. The Company is currently in the process of evaluating the impact this law will have on the consolidated financial statements and calculating the related impact to the Company’s tax expense. The Company expects the largest impact to the company from this legislation to be from the provisions that lower the corporate tax rate to 21% beginning on January 1, 2018, and impose tax on earnings outside the United States that have previously not been subject to United States tax, which must be paid beginning in fiscal 2019 through fiscal 2026. The adjustments to the Company’s tax expense for this legislation will be recorded beginning in the period of enactment and are not expected to materially affect the consolidated financial statements, given the Company’s net deferred tax asset position has a full valuation allowance.
At November 30, 2017, the Company has a net operating loss (“NOL”) carryforward for Federal and state income tax purposes totaling approximately $10.0 million available to reduce future taxable income which, if not utilized, will begin to expire in the year 2037. The NOL carry forward is subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss carryforwards to offset taxable income may be limited based on cumulative changes in ownership. The Company has not completed an analysis to determine whether any such limitations have been triggered as of November 30, 2017. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses since inception, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of November 30, 2017 and 2016. The valuation allowance increased by approximately $5.9 million and $2.5 million for the fiscal years ended November 30, 2017 and 2016.
The tax effects of the temporary differences and carry forwards that give rise to deferred tax assets consist of the following:
| As of November 30, | |||
| 2017 | 2016 | ||
| Deferred tax assets: | |||
| Net-operating loss carryforward | $ 3,810,498 | $ 885,120 | |
| Stock-based compensation | 4,466,254 | 1,685,262 | |
| License agreement | 595,780 | 293,433 | |
| Tax amortization for license agreement | (102,747) | - | |
| Charitable contributions | 387 | - | |
| Total Deferred Tax Assets | 8,770,172 | 2,863,815 | |
| Valuation allowance | (8,770,172) | (2,863,815) | |
| Deferred Tax Asset, Net of Allowance | $ - | $ - | |
A reconciliation of the statutory income tax rates and the Company’s effective tax rate is as follows:
| For the year ended November 30, | |||||
| 2017 | 2016 | ||||
| Statutory Federal Income Tax Rate | (34.0) | % | (34.0) | % | |
| State and Local Taxes, Net of Federal Tax Benefit | (10.3) | % | (4.7) | % | |
| Loss on conversion of debt | 1.4 | % | 0.5 | % | |
| Gain/ loss on extinguishment of convertible note | 0.2 | % | (0.7) | % | |
| Change in fair value of embedded conversion option and related accretion of interest expense | 4.4 | % | 1.6 | % | |
| Change in fair value of warrant liability | 0.2 | % | 0.0 | % | |
| Loss on modification of Private Placement Units | 0.0 | % | 0.2 | % | |
| Loss on issuance of convertible debt | 0.0 | % | 2.6 | % | |
| Non-U.S. operations | 0.3 | % | 0.0 | % | |
| Change in Valuation Allowance | 37.8 | % | 34.5 | % | |
| Income Taxes Provision (Benefit) | 0.0 | % | 0.0 | % | |
The Company's major tax jurisdictions are the United States and New York. All of the Company's tax years will remain open starting 2013 for examination by the Federal and state tax authorities from the date of utilization of the net operating loss. The Company does not have any tax audits pending.