Annual report pursuant to Section 13 and 15(d)

Income Tax

v3.19.1
Income Tax
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Tax

11.

Income Tax

 

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of December 31, 2018 and 2017, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with these items. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of operations. As of December 31, 2018 and 2017, the Company had no such accruals.


The components of income tax expense (benefit) attributable to continuing operations are as follows:


 

 

2018

 

 

2017

 

Current Expense:

 

 

 

 

 

 

Federal

 

$

—

 

 

$

—

 

State

 

 

—

 

 

 

—

 

Foreign

 

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

Deferred Expense:

 

 

 

 

 

 

 

 

Federal

 

$

(985,488

)

 

$

(762,580

)

State

 

 

—

 

 

 

(46,960

)

Foreign

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

Total

 

$

(985,488

)

 

$

(809,540

)


The differences between the company’s income tax expense attributable to continuing operations and the expense computed at the 21 % United States statutory income tax rate were as follows:


 

 

2018

 

 

2017

 

Federal income tax expense at statutory rate:

 

$

(3,577,000

)

 

$

(4,495,000

)

Increase (reduction) in income tax resulting from:

 

 

 

 

 

 

 

 

State Income Taxes

 

 

(207,000

)

 

 

(194,000

)

Foreign Rate Differential

 

 

(17,000

)

 

 

(16,000

)

Nondeductible Expenses

 

 

7,000

 

 

 

9,000

 

Prior Period True-Up - Pelican

 

 

208,000

 

 

 

—

 

Research & Development Credit

 

 

(763,000

)

 

 

(409,000

)

Stock Based Compensation

 

 

60,000

 

 

 

84,000

 

Acquisition Costs

 

 

—

 

 

 

96,000

 

Reserve for Loss Carryforwards Limited by Sec. 382

 

 

22,000

 

 

 

(541,000

)

Tax Reform Impact

 

 

—

 

 

 

(8,024,000

)

Other

 

 

25,512

 

 

 

45,460

 

Increase (Decrease) in Valuation Allowance

 

 

3,256,000

 

 

 

(3,445,000

)

 

 

 

 

 

 

 

 

 

 

 

$

(985,488

)

 

$

(809,540

)


The tax effects of temporary differences and operating loss carryforwards that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows at December 31, 2018 and December 31, 2017:


 

 

2018

 

 

2017

 

Deferred tax assets:

 

 

 

 

 

 

Net Operating Loss Carryfowards

 

$

18,731,555

 

 

$

15,117,487

 

R&D Credits

 

 

2,729,737

 

 

 

1,966,964

 

Stock Compensation

 

 

744,506

 

 

 

629,447

 

Contingent Consideration

 

 

713,259

 

 

 

599,343

 

Other Accrued Expenses

 

 

—

 

 

 

128,522

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

22,919,057

 

 

 

18,441,763

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Property, plant and equipment, primarily due to differences in depreciation

 

 

(127,140

)

 

 

(26,307

)

Other Accrued Expenses

 

 

(11,926

)

 

 

—

 

Intangible Assets

 

 

(1,302,220

)

 

 

(1,302,220

)

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

(1,441,286

)

 

 

(1,328,527

)

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(21,794,504

)

 

 

(18,415,456

)

 

 

 

 

 

 

 

 

 

Net deferred tax assets (liabilities)

 

$

(316,733

)

 

$

(1,302,220

)


At December 31, 2018 and December 31, 2017, the Company evaluated all significant available positive and negative evidence, including the existence of losses in recent years and management’s forecast of future taxable income, and, as a result, determined it was more likely than not that federal and state deferred tax assets, including benefits related to net operating loss carryforwards, would not be realized.  The valuation allowance was increased from $18,415,456 at December 31, 2017 to $21,794,504 at December 31, 2018.  Net Operating Losses created in years beginning after 2017 now only offset 80% of Taxable Income but no longer have a 20 year expiration. As such, NOL’s created after 2017 can be used to offset indefinite lived liabilities up to 80%. This change in tax law created a reduction of the deferred tax liability by $985,488 during 2018.



At December 31, 2018, the Company has federal net operating loss carryforwards of approximately $84,517,142, including $3,027,284 acquired from Pelican Therapeutics, which are available to offset future taxable income. However, due to potential Section 382 limitations (discussed in further detail below) a reserve has been set up for the Pelican Therapeutics NOL of $(2,344,952).  The federal net operating loss carryforwards begin to expire in 2029.  The Company has various state net operating loss carryforwards totaling approximately $73,861,907 including $2,922,000 from Pelican Therapeutics, which are available to offset future state taxable income. State net operating losses begin to expire in 2024.  The Company has various foreign net operating loss carryforwards of approximately $122,605.  The foreign net operating loss carryforwards are carried forward indefinitely.  Because the Company has incurred cumulative net operating losses since inception, all tax years remain open to examination by U.S. federal, state, and foreign income tax authorities.


In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of December 31, 2018 and 2017, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with these items. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying statements of income. As of December 31, 2018 and 2017, the Company had no such accruals.


The Company files income tax returns in the United States, various state and foreign jurisdictions. The Company is subject to examination by taxing authorities for the tax years ended December 31, 2009 through 2017.


Potential 382 Limitation


The Company’s ability to utilize its net operating loss (NOL) and research and development (R&D) credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.


The Company has not completed a study to assess whether one or more ownership changes have occurred since the Company became a loss corporation under the definition of Section 382. If the Company has experienced an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC-740. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.