Note 11 — Income Taxes

 

For financial reporting purposes, the Company calculated income tax provision and deferred income tax balances as if it was a separate entity and had filed its own separate tax return under Sub-Chapter C of the Internal Revenue Code.

 

A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:

 

		For the years ended  December 31,
		2017			2016
Statutory federal income tax rate			35	%		35	%
State taxes, net of federal tax benefit			8	%		4	%
Federal tax rate change			(20)	%		0	%
State tax rate change			1	%		(1)	%
Non-deductible items			(3)	%		0	%
Other			(1)	%		0	%
Credits			1	%		0	%
Change in valuation allowance			(21)	%		(38)	%
Income taxes provision (benefit)			0	%		0	%

 

The components of the net deferred tax asset as of December 31, 2017 and 2016 are the following (in thousands):

 

		As of December 31,
		2017			2016
Deferred tax assets:
Net operating loss carryovers		$	4,220		$	2,080
Stock compensation and other			70			-
Change in warrant liabilities			226			73
Amortization of license			1,064			1,064
Accruals and reserves			8			78
Tax credits			154			33
Total deferred tax assets			5,742			3,328
Less valuation allowance			(5,742)			(3,318)
Stock compensation and other			-			(10)
Deferred tax assets, net of valuation allowance		$	-		$	-

 

The Company has determined, based upon available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against it. A valuation allowance of approximately $5.7 million and $3.3 million was recorded for the years ended December 31, 2017 and 2016, respectively.

 

The Tax Cuts and Jobs Act (“Tax Act,”) was enacted on December 22, 2017. The act significantly changes US tax law by, among other things, lowering US corporate income tax rates, implementing a territorial tax system, and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduces the US corporate income tax rate from 35% to 21%, effective January 1, 2018.  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 reverse. As a result of the reduction in the US corporate tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax assets at December 31, 2017. There was no impact as a result of the revaluation of the deferred tax assets as the Company is in a full valuation allowance. 

 

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during the measurement period.  The Company is in the process of analyzing the impact of the various provisions of the Tax Act. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

  

As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $15.1 million and $15.5 million, respectively. The federal and state net operating loss carryforwards will begin to expire, if not utilized, by 2035 and 2035, respectively. Utilization of the net operating loss carryforward may be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 (“IRC”), as amended and similar state provisions. The Company may have undergone an ownership change under Section 382 of the IRC from the issuance of its common stock. The Company would determine whether an ownership change has occurred and the annual limitation before the Company could utilize its net operating losses to offset taxable income.

 

The Company is included in the consolidated income tax returns of Fortress Biotech, Inc. and Subsidiaries. The Company’s federal and state net operating loss carryforwards may be utilized to offset income of other members included in the consolidated income tax returns for which the Company may be compensated pursuant to outstanding tax-sharing agreements.

 

There are no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with ASC 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements, that have been recorded on the Company’s financial statements for the period ended December 31, 2017. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.

 

Additionally, ASC 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the period ended December 31, 2017.

 

The federal and state tax returns for the period ended December 31, 2015 and the year ended December 31, 2016 are currently open for examination under the applicable federal and state income tax statues of limitations.