Income Taxes

12 Months Ended

Dec. 31, 2018

15.

Income Taxes

At December 31, 2018, the Company had a net operating loss carryforward for federal income tax purposes of $43.8 million, $35.8 million of which begins to expire in varying amounts in tax year 2026. $8.0 million of net operating losses, incurred after December 31, 2017, carryforward indefinitely. During the years ended December 31, 2018 and 2017, the Company raised additional equity capital. IRC Section 382 imposes certain limitations on the use of a net operating losses to offset future taxable income when an ownership change has occurred. The Company has yet to determine whether an ownership change occurred in 2018 or 2017. If an ownership change is determined to have occurred, additional limitations on the Company’s net operating losses incurred prior to the ownership change may apply. The Company has a research and development tax credit carryforward of $1.8 million for federal income tax purposes that begins to expire in varying amounts in tax year 2028.

In assessing the ability to realize its deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers evidence such as the reversal of deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, significant book losses during the current and prior periods, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management continues to conclude that the Company does not meet the “more likely than not” requirement of ASC 740 in order to recognize deferred tax assets. As such, a valuation allowance has been recorded to offset the Company’s net deferred tax assets at December 31, 2018. The Company recorded an increase in the valuation allowance of $1.8 million for the year ended December 31, 2018.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly changes corporate income tax laws in the U.S. including reducing the corporate income tax rate from a maximum of 35% to a flat rate of 21%, effective January 1, 2018. As a result of the reduction in the corporate income tax rate under the 2017 Tax Act, an adjustment was recorded in 2017 to the deferred tax asset of $4.9 million.

Due to the uncertainty surrounding the realization of the benefits of its deferred assets, including NOL carryforwards, the Company has provided a 100% valuation allowance on its deferred tax assets at December 31, 2018 and 2017.

The valuation balances were

$11.4 million and $9.5

million at December 31, 2018 and 2017, respectively.

The components of the Company’s deferred tax asset are as follows:

	December 31,
	2018			2017
	(in thousands)
Deferred tax assets – non-current

Accrued bonuses	$	12		$	-
Accrued vacation		15			17
Net operating loss (NOL) carryover		9,191			7,516
Technology license amortization		-			36
Research & development tax credits		1,780			1,542
Share based expense		310			387
Other		5			5
Fixed asset depreciation		50			15
Total deferred tax asset		11,363			9,518
Less: valuation allowance		(11,363	)		(9,518	)
Net deferred tax asset		-			-
Deferred tax liability- non-current		-			-
Net deferred tax asset	$	-		$	-

Reconciliation between income taxes at the statutory tax rate (21% to 34%) and the actual income tax provision for continuing operations follows:

	December 31,
	2018			2017			2016
	(in thousands)
Loss before income taxes	$	(8,583	)	$	(7,023	)	$	(6,750	)
Tax (benefit) at statutory tax rate		(1,802	)		(2,388	)		(2,295	)
Effects of:
Exclusion of incentive stock option expense		47			86			117
R&D tax credits		(238	)		(283	)		(252	)
Increase (decrease) in valuation allowance		1,845			(1,447	)		3,001
FMV of warrants		-			(658	)		(582	)
Prior year adjustments		-			5			6
Carryforward adjustment		2			(252	)		5
Stock option forfeitures		146			-			-
Rate change on net deferred tax asset		-			4,937			-
Provision for income taxes	$	-		$	-		$	-

As of December 31, 2018, the Company had no unrecognized income tax benefits. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items as tax expense. No interest or penalties have been recorded as of the year ended December 31, 2018, and no interest or penalties have been accrued as of December 31, 2018 and 2017.

The Company’s open years for Internal Revenue Service (IRS) examination purposes due to normal statute of limitation are 2015, 2016 and 2017. However, since the Company has operating loss carryforwards, the IRS has the ability to make adjustments to items that originate in a year otherwise barred by the statute of limitations under Section 6501 of the Internal Revenue Code of 1986, as amended (the “code”), in order to redetermine tax for an open year to which those items are carried. Therefore, in a year in which a net operating loss deduction was claimed, the IRS may examine the year in which the net operating loss was generated and adjust it accordingly for purposes of assessing additional tax in the year the net operating loss was claimed. The Company is not currently under examination by the IRS or any other taxing authorities.