10. Income Taxes

 

The components of loss before income taxes are as follows:

 

		Year Ended December 31,
		2017			2016
Domestic		$	(15,102,521)		$	(13,831,191)
Foreign			542,631			487,754
Total		$	(14,559,890)		$	(13,343,437)

 

The components of income tax benefit are as follows:

 

		Year Ended December 31,
		2017			2016
Deferred Taxes:
Federal		$	(1,160,312)		$	-
State			(181,661)			-
Total Deferred Taxes		$	(1,341,973)		$	-
Income Tax Benefit		$	(1,341,973)		$	-

 

The difference between the effective rate reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory U.S. tax rate are analyzed below:

 

		Year Ended December 31,
		2017				2016
United States Federal Income Tax Rate			34.00	%			34.00	%
State Taxes, Net of Federal Benefit			4.68	%			1.84	%
Permanent Differences			(2.67)	%			(2.47)	%
Change in Valuation Allowance			46.88	%			(35.02)	%
Research and Development Credits			1.97	%			2.95	%
Tax Rate Differential			0.01	%			0.13	%
Federal Rate Change			(71.74)	%			0.00	%
Other			(3.91)	%			(1.43)	%
Effective Tax Rate			9.22	%			0.00	%

 

The Company’s deferred tax assets and liabilities consist of the following:

 

		2017			2016
Net Deferred Tax Liability:
Net Operating Loss Carryforwards		$	12,624,253		$	18,146,381
Research and Development Credit Carryforwards			2,002,640			1,640,669
Capitalized Research and Development			5,172,541			6,398,050
Nonqualified Stock Option			552,096			323,832
Depreciation and Amortization			(82)			3,478
Cash Versus Accrual Adjustments			4,459,785			4,387,806
Total Deferred Tax Assets			24,811,233			30,900,216
Valuation Allowance			(24,075,539)			(30,900,216)
Net Deferred Tax Asset			735,694			-
In-Process Research and Development			(919,617)			(1,525,896)
Net Deferred Tax Liability		$	(183,923)		$	(1,525,896)

   

On December 22, 2017, the TCJA was enacted and significantly revised the U.S. income tax law. The TCJA includes changes, which reduce the corporate income tax rate from 34% to 21% for years beginning after December 31, 2017 and transitions the U.S. towards a territorial tax system where U.S. shareholders of certain foreign subsidiaries would be subject to a one-time transition tax on unrepatriated accumulated foreign earnings.

 

U.S. GAAP requires re-measurement of U.S. deferred tax assets and liabilities to reflect the impact of tax rate reduction in the period that includes enactment date. As a result, the Company had revalued its deferred taxes assets and liabilities to 21% in the December 31, 2017 financial statements and the impact was offset by the Company’s valuation allowance. The Company has reflected the associated impact in the reconciliation of the Company’s effective tax rate above.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued and allows a company to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. SAB 118 provides for a measurement of up to one year from the date of enactment. The Company has not yet fully completed its analysis of the TCJA, however based on the total unrepatriated accumulated foreign earnings, the Company does not believe any additional income taxes are due as any income, if determined, will be fully offset by the Company’s net operating losses.

 

As of December 31, 2017, the Company has federal, and state net operating loss carryforwards of approximately $45,494,000 and $33,258,000, respectively, to offset future federal and state taxable income, which expire at various times through 2037. The Company has foreign net operating loss carryforwards of $3,201,000 as of December 31, 2017, which can be carried forward indefinitely. As of December 31, 2017, the Company also has federal, state and foreign research and development tax credit carryforwards of approximately $1,601,000, $478,000, and $25,000, respectively, to offset future income taxes, which expire at various times through 2037. The federal and state net operating loss and research tax credit carryforwards may be subject to the limitations provided in the Internal Revenue Code (“IRC”) Sections 382 and 383. A portion of the federal net operating loss attributable to Jade is subject to a Section 382 limitation. Jade’s carryover of its research and development credits will be subject to the Section 383 limitation.

The Company files United States federal income tax returns and income tax returns in the Commonwealth of Massachusetts, Utah, and New Jersey, as well as foreign tax returns for its subsidiary in France. The Company is not under examination by any jurisdiction for any tax year.

 

The Company has recorded a valuation allowance against its United States deferred tax assets in each of the years ended December 31, 2017, and 2016 because the Company’s management believes that it is more likely than not that these assets will not be realized. The valuation allowance decreased by approximately $6,800,000 and increased by approximately $4,810,000 during the years ended December 31, 2017 and 2016, respectively, primarily as a result of adjustments for accrual to cash basis items and capitalized research and development expenses. Additionally, during the year ended December 31, 2017, deferred tax assets and liabilities were reduced to reflect the new federal tax rate under the TCJA and the Company partially released its valuation allowance against its previously recorded deferred tax assets where future reversals of deductible temporary differences, such as those from the Company’s indefinite-lived in-process research and development, can offset taxable temporary differences from future net operating loss carryforwards due to their indefinite carryforward period under new tax law.

As of December 31, 2017 and 2016, the Company had no unrecognized tax benefits or related interest and penalties accrued. The Company will recognize interest and penalties related to tax positions in income tax expense. The Company has not, as yet, conducted a study of R&D credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards, however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position.

 

The net operating loss and tax credit carryforwards are subject to review by the Internal Revenue Service in accordance with the provisions of Section 382 of the Internal Revenue Code. Under this Internal Revenue Code section, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset the Company’s taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the Company’s net operating loss carryforwards before they expire. The closing of the Company’s initial public offering, alone or together with transactions that have occurred or that may occur in the future, may trigger an ownership change pursuant to Section 382, which could limit the amount of research and development tax credit and net operating loss carryforwards that could be utilized annually in the future to offset the Company’s taxable income, if any. Any such limitation as the result of the Company’s additional sales of common stock by the Company could have a material adverse effect on the Company’s results of operations in future years.