Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

The Company accounts for income taxes in accordance with ASC 740 (Topic 740, Income Taxes). ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in the financial statements or tax returns. ASC Topic 740 also clarifies the accounting for uncertainty in income taxes recognized in the financial statement. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded in the financial statements for the calendar year 2017. Tax years beginning in 2014 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

ASC Topic 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 calendar year 2017. It is the Company's policy to treat interest and penalties, to the extent they arise, as a component of income taxes.

The income tax provision consisted of the following for the years ending December 31, 2017, 2016 and 2015:



	2017			2016		2015
Current:
Federal	$	2,309,285		$	—	$	—
State	489,863			—		—
	2,799,148			—		—

Deferred:
Federal	(789,274		)	—		—
State	(43,355		)	—		—
	(832,629		)	—		—
Net Income Tax Expense	$	1,966,519		$	—	$	—

The net deferred tax liabilities consisted of the following for the years ending December 31, 2017 and 2016:



	December 31,
	2017			2016
Deferred tax assets:
Net operating losses	$	716,819		$	20,587,955
Research and development credits	—			1,840,505
Deferred rent	4,051			11,902
Accrued compensation	271,437			90,936
Stock-based compensation	1,291,230			2,169,070
Other reserves	72,881			—
Basis difference in tangible and intangible assets	2,554,924			6,174,163
Total deferred tax assets	4,911,342			30,874,531
Deferred tax liabilities:
Basis difference in intangible assets	(535,652		)	—
Installment sale	(358,844		)	—
Total deferred tax liabilities	(894,496		)	—
Deferred tax asset, net	4,016,846			30,874,531
Less valuation allowance	(4,023,990		)	(30,874,531		)
Net deferred taxes	$	(7,144	)	$	—

As of December 31, 2017, the Company has approximately $3,012,000 of gross net operating losses for Federal and State purposes that will begin to expire in 2031.

The income tax expense for the years ended December 31, 2017 and 2016 differed from the amounts computed by applying the U.S. federal income tax rate of 34% as follows:



	December 31,
	2017		2016		2015
Federal statutory rate	34.00	%	34.00	%	34.00	%
Permanent differences	0.02	%	(0.02	)%	(0.02	)%
Warrants	0.07	%	0.15	%	4.26	%
Acquisition costs	0.08	%	—	%	—	%
Built in loss	1.52	%	—	%	—	%
State taxes	27.91	%	3.44	%	5.12	%
Research and development credit	(1.04	)%	2.18	%	2.69	%
Change in statutory rate due to Tax Cuts and Job Act	15.82	%	—	%	—	%
NOL adjustment per § 382	126.82	%	—	%	—	%
Other	0.04	%	—	%	0.03	%
Change in valuation allowance	(191.03	)%	(39.75	)%	(46.08	)%
Effective income tax rate	14.21	%	—	%	—	%

The valuation allowance recorded by the Company as of December 31, 2017 and 2016 resulted from the uncertainties of the future utilization of deferred tax assets relating from net operating loss carry forwards for federal and state income tax purposes. Realization of the NOL carry forwards is contingent on future taxable earnings. The net deferred tax asset was reviewed for expected utilization using a “more likely than not” approach by assessing the available positive and negative evidence surrounding its recoverability. Accordingly, a full valuation allowance continues to be recorded against the Company’s net deferred tax asset as of December 31, 2017 and 2016, as it was determined based upon past and projected future losses that it was “more likely than not” that the Company’s net deferred tax assets would not be realized. In future years, if the net deferred tax assets are determined by management to be “more likely than not” to be realized, the recognized tax benefits relating to the reversal of the valuation allowance as of December 31, 2017 and 2016 will be recorded.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately as such time when it is determined that the “more likely than not” criteria is satisfied.

Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company has undergone an ownership change study and has determined that a "change in ownership" as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, did occur in February 2012, July 2014, and April 2017. Accordingly, about $52,170,000 of the Company's NOL carryforwards are limited. Based on the Company having undergone multiple ownership changes throughout their history these NOLs are subject to limitation at varying rates each year. Approximately, $2,800,000 of these NOLs can be utilized before the 2017 ownership change and $46,000,000 of NOLs and R&D Credits are expected to expire unused. The deferred tax assets associated with the attributes that will expire without utilization have been written-off. There are $107,702 of NOLs available for use after the April 2017 change in 2017. In subsequent years, the NOLs available from the April 2017 change under section 382 are $158,513, annually.

On December 22, 2017, H.R. 1 (also, known as the Tax Cuts and Jobs Act (the “Act”)) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. federal corporate tax rate from 35% to 21%. As a result, the Company believes that the most significant impact on its consolidated financial statements is the reduction of approximately $2,200,000 in deferred tax assets and liabilities related to net operating losses and other assets. Such reduction is largely offset by changes to the Company’s valuation allowance. The Company is reporting the impacts of the Act provisionally based upon reasonable estimates.

In addition, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Act ("SAB 118") which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, ongoing guidance and accounting interpretation are expected over the next year, and significant data and analysis is required to finalize amounts recorded pursuant to the Tax Act, the Company considers the accounting for the deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.