Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

The Company accounts for income taxes in accordance with ASC 740 (Topic 740, Income Taxes). ASC Topic 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 our financial statement for the calendar year 2018. Tax years beginning in 2015 are generally subject to examination by taxing authorities, although NOLs 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 $0.2 million of interest and penalties related to unrecognized tax benefits for income taxes that have been accrued or recognized as of and for the year ended December 31, 2018. 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, 2018 and 2017:



	December 31,
	2018			2017
Current:
Federal	$	(53,281	)	$	2,309,285
State	36,116			489,863
Total Current:	(17,165		)	2,799,148

Deferred:
Federal	(52,235		)	(789,274		)
State	35,490			(43,355		)
Total Deferred	(16,745		)	(832,629		)
Net income tax (benefit) expense	$	(33,910	)	$	1,966,519

The net deferred tax liabilities consisted of the following for the years ending December 31, 2018 and 2017:



	December 31,
	2018			2017
Deferred tax assets:
Net operating losses	$	4,421,423		$	716,819
Accrued compensation	465,430			271,437
Deferred rent	15,373			4,051
Tax credits	252,095			—
Stock-based compensation	1,922,736			1,291,230
Installment sale	508,291			—
Other reserves	262,260			72,881
Basis difference in tangible and intangible assets, net	2,968,764			2,019,272
Total deferred tax assets	10,816,372			4,375,690
Deferred tax liabilities:
Prepaid expenses	(160,474		)	—
Installment sales	—			(358,844		)
Total deferred tax liabilities	(160,474		)	(358,844		)
Deferred tax asset, net	10,655,898			4,016,846
Less valuation allowance	(10,725,136		)	(4,023,990		)
Net deferred taxes	$	(69,238	)	$	(7,144	)

As of December 31, 2018, the Company has roughly $16,426,000 of gross NOLs for federal and state tax purposes of which approximately $3,580,000 will begin to expire in 2031, while the remaining amount of $12,846,000 will carryforward indefinitely.

The income tax benefit for the years ended December 31, 2018 and 2017 differed from the amounts computed by applying the U.S. federal income tax rate as follows:



	December 31,
	2018		2017
Federal statutory rate	21.00	%	34.00	%
Permanent Adjustments	(0.37	)%	0.17	%
Built-in-loss	(0.33	)%	1.52	%
State taxes	4.43	%	27.91	%
Research and development credit	0.61	%	(1.04	)%
Change in statutory rate due to Tax Cuts and Job Act	—	%	15.82	%
NOL adjustment per § 382	—	%	126.82	%
Non-deductible IPR&D expense	(9.84	)%	—	%
Other	(0.04	)%	0.04	%
Change in valuation allowance	(15.37	)%	(191.03	)%
Effective income tax rate	0.09	%	14.21	%

The valuation allowance recorded by the Company as of December 31, 2018 and December 31, 2017 resulted from the uncertainties of the future utilization of deferred tax assets relating from NOL carry forwards for federal and state income tax purposes. Realization of the NOL carry forwards is contingent on future taxable earnings. The 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 partial valuation allowance continues to be recorded against the Company’s deferred tax asset as of December 31, 2018 and December 31, 2017, as it was determined based upon past and projected future losses that it was “more likely than not” that the Company’s deferred tax assets would not be realized. As of December 31, 2018 and December 31, 2017, the Company has a net deferred tax liability due to having an indefinite life asset, referred to as a “naked credit.” The naked credit can be offset up to 80% by NOLs generated after January 1, 2018, the remaining 20% remains as a liability. In future years, if the 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, 2018 and December 31, 2017 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.

The Company's current and future unused losses may be subject to limitation under Sections 382 and 383 of the IRC. Sections 382 and 383 of the IRC subject the future utilization of NOLs 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 (in general, an “ownership change” is defined as a greater than 50% change (by value) in equity ownership over a three-year period).

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 IRC, the Act reduces U.S. federal corporate tax rate from 35% to 21%. In addition, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Act ("SAB 118") which allowed 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 was expected over the past year, and significant data and analysis was required to finalize amounts recorded pursuant to the Tax Act, the Company considered the accounting for the deferred tax remeasurements and other items to be incomplete at December 31, 2017 due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company has completed its analysis within the measurement period in accordance with SAB 118 and there were no material additional adjustments necessary.