Avenue Therapeutics, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

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,
	2018			2017
Statutory federal income tax rate		21	%		35	%
State taxes, net of federal tax benefit		9	%		8	%
Federal tax rate change		0	%		(20	)%
State tax rate change		0	%		1	%
Non-deductible items		0	%		(3	)%
Other		0	%		(1	)%
Credits		5	%		1	%
Change in valuation allowance		(35	)%		(21	)%
Income taxes provision (benefit)		0	%		0	%

The components of the net deferred tax asset as of December 31, 2018 and 2017 are the following (in thousands):

	As of December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryovers	$	10,160		$	4,220
Stock compensation and other		658			70
Change in warrant liabilities		-			226
Amortization of license		1,006			1,064
Accruals and reserves		221			8
Tax credits		1,294			154
Total deferred tax assets		13,339			5,742
Less valuation allowance		(13,339	)		(5,742	)
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 $13.3 million and $5.7 million was recorded for the years ended December 31, 2018 and 2017, respectively.

On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act,” was signed into law. Among other items, H.R.1 reduced the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company recorded a decrease related to its deferred tax assets and valuation allowance of $2.5 million, with a corresponding net adjustment to deferred income tax expense of zero for the year ended December 31, 2017.

As of December 31, 2018, the Company had federal and state net operating loss carryforwards of approximately $34.5 million and $43.1 million, respectively. The federal and state net operating loss carryforwards will begin to expire, if not utilized, by 2035 and 2035, respectively. The Company has $1.3 million of research and development credit carryforwards, which will begin to expire, if not utilized, in 2035. Utilization of the net operating loss and credit carryforwards 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. Certain tax attributes are subject to an annual limitation as a result of the Company’s June 2017 initial public offering, which constitutes an ownership change under Section 382. Certain tax attributes may be subject to an annual limitation as a result of the SPMA with InvaGen, which could constitute an ownership change under Section 382.

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 periods ended December 31, 2018 and 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 periods ended December 31, 2018 and 2017.

The federal and state tax returns for the period ended December 31, 2015 and the years ended December 31, 2016, 2017, and 2018 are currently open for examination under the applicable federal and state income tax statues of limitations.