7. Income Taxes

Loss before income taxes consisted of the following components:



	Year Ended December 31,
	2017		2016
United States	$	(6,934,000)	$	(6,358,000)
Foreign		(7,206,000)		(13,036,000)
	$	(14,140,000)	$	(19,394,000)

The benefit from income taxes consisted of the following components:



	Year Ended December 31,
	2017		2016
Current:
Federal	$	-	$	-
State		-		-
Foreign		-		-
		-		-
Deferred:
Federal		-		-
State		-		-
Foreign		(1,302,000)		(556,000)
		(1,302,000)		(556,000)
Total	$	(1,302,000)	$	(556,000)

The Company recorded an income tax benefit of $1.3 million for the year ended December 31, 2017 related to a reduction of the existing deferred tax liability during the second quarter of 2017 as a result of a $5.8 million impairment charge to the Company’s IPR&D assets. During the year ended December 31, 2016, the Company recorded an income tax benefit of $0.6 million, comprised of a $0.4 million income tax benefit related to a reduction of the existing deferred tax liability from a $2.0 million impairment charge to the Company’s IPR&D assets, and a $0.2 million income tax benefit as a result of the reduction of deferred tax liability resulting from changes in UK enacted tax rates from 20% to 17% in 2016.

Significant components of the Company’s deferred tax assets and liabilities were as follows:



	December 31,
	2017		2016
Deferred tax assets:
Net operating loss carryforwards	$	44,049,000	$	67,479,000
Research and development and other tax credits, net		3,109,000		3,109,000
Stock-based compensation		188,000		795,000
Other		165,000		301,000
		47,511,000		71,684,000
Valuation allowance		(47,511,000)		(71,684,000)
Total deferred tax assets		-		-
Deferred tax liabilities:
In-process research and development		(1,147,000)		(2,449,000)
Total deferred tax liabilities	$	(1,147,000)	$	(2,449,000)

At December 31, 2017, the Company had federal net operating loss (“NOL”) carryforwards of approximately $198.1 million, of which $7.3 million will expire in 2018 unless utilized, and the remaining carryforwards will expire in taxable years 2019 through 2037. The Company had foreign NOL carryforwards of $9.0 million as of December 31, 2017, $0.6 million of which was generated in 2017. At December 31, 2017, the Company had federal research and development (“R&D”) tax credit carryforwards of approximately $3.1 million, net of a reserve for uncertain tax positions of $2.1 million. The R&D tax credit carryforwards will begin to expire in taxable years 2018 through 2031, unless previously utilized. The NOL and tax credit carryforwards may be further subject to the application of Section 382 of the Internal Revenue Code of 1986 (the “Code”) as discussed further below. The Company has provided a valuation allowance to offset the deferred tax assets due to the uncertainty of realizing the benefits of the net deferred tax asset.

The differences between the Company’s effective tax rate and the U.S. federal statutory tax rate were as follows:



	December 31,
	2017		2016

U.S. federal statutory income tax rate	34.0	%	34.0	%
Adjustments for tax effects of:
Fair value of derivative liabilities	3.6	%	8.0	%
Foreign rate differential	(4.4)	%	(1.5)	%
Stock-based compensation	(1.0)	%	(0.6)	%
State taxes, net of federal benefit	(1.7)	%	(3.8)	%
Australia refundable R&D tax offset	(2.4)	%	(5.2)	%
Goodwill impairment	-		(13.2)	%
Effect of change in federal tax rate	(184.2)	%	-
Change in reserve of uncertain tax positions	-		(10.7)	%
Change in valuation allowance	170.9	%	(3.5)	%
All other	(5.6)	%	(0.6)	%
Effective income tax rate	9.2	%	2.9	%

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Shortly after enactment, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the Tax Reform Act’s impact. SAB 118 requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded additional tax expense of $26.0 million during the year ended December 31, 2017, however, this amount was fully offset by a valuation allowance and no net income tax expense or benefit was recorded in the consolidated financial statements. This net tax expense of $0 represents a provisional amount and is the Company’s current best estimate. The provisional amount incorporates assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as additional clarification and implementation guidance is received. The Company did not record any deemed repatriation tax on unremitted foreign Earnings and Profits (“E&P”) due to the accumulated and projected current deficit in foreign E&P for the year ended December 31, 2017.

Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) tax rules, we continue to evaluate this provision of the Tax Reform Act and the application of Accounting Standards Codification 740, “Income Taxes.” Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of its deferred taxes (the “deferred method”). The Company has not yet adopted an accounting policy with respect to GILTI at December 31, 2017.

The Company’s past sales and issuances of common and preferred stock have likely resulted in ownership changes as defined by Section 382 of the Code. The Company has not conducted a Section 382 study to date. It is possible that a future analysis may result in the conclusion that a substantial portion, or perhaps substantially all of the Company’s NOL carryforwards and R&D tax credit carryforwards will expire due to the limitations of Sections 382 and 383 of the Code. As a result, the utilization of the carryforwards may be limited and a portion of the carryforwards may expire unused.

The Company has unrecognized tax benefits of approximately $2.1 million related to its federal R&D tax credits as of December 31, 2017. The credits are subject to a valuation allowance and thus, any change to the uncertain tax position reserve would not result in an income tax benefit or expense.

The Company is subject to U.S. federal tax examinations by tax authorities for the years 1998 to 2016 due to the fact that NOL carryforwards exist going back to 1998 that may be utilized on a current or future year tax return.

The Company has a policy of recognizing tax related interest and penalties as additional tax expense when incurred. During the years ended December 31, 2017 and 2016, the Company did not recognize any interest or penalties. The Company does not expect its unrecognized tax benefits will change significantly over the next twelve months.