Annual report pursuant to Section 13 and 15(d)

9. Income Taxes

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9. Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

9. Income Taxes

 

Deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company has provided a full valuation allowance on the Company’s deferred tax assets because the Company believes it is more likely than not that its deferred tax assets will not be realized. The Company evaluates the recoverability of its deferred tax assets on a quarterly basis. Currently, there is no provision for income taxes as the Company has incurred losses to date.

 

The components of loss before income taxes are as follows:

 

    Year ended December 31,  
    2019     2018  
Domestic (U.S.)   $ (4,317,585 )   $ (3,824,673 )
Foreign (U.K.)     (2,302,131 )     (3,379,268 )
Foreign (Germany)     (3,389,473 )     (96,517 )
Foreign (Switzerland)     (2,765,836 )      
Loss before income taxes   $ (12,775,025 )   $ (7,300,458 )

   

The reconciliation of income tax benefit at the U.S. corporation tax rate, being the rate applicable to the country of domicile of the Company to net income tax benefit is as follows:

 

    Year ended December 31,  
    2019     2018  
Federal   $ (2,682,755 )   $ (1,533,096 )
State     (284,724 )     (238,952 )
Increase in tax losses not recognized     1,878,033       1,695,482  
Permanent differences, net     1,323       40,015  
Goodwill impairment     689,510        
Foreign rate differential     381,190       124,294  
Share-based payments, net     11,084       20,441  
Enhanced research and development tax credits     (54,148 )     (108,184 )
Other items     60,487        
Net provision (benefit) for income taxes   $     $  

  

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:

 

    Year ended December 31,  
    2019     2018  
Deferred tax assets:                
U.K. net operating loss carryforwards   $ 8,984,851     $ 8,039,343  
U.K. capital loss carryforwards     1,340,302       1,298,303  
U.S. federal net operating loss carryforwards     3,857,973       3,184,691  
Switzerland net operating loss carryforwards     23,510        
IPR&D     6,454,240       6,108,078  
Share-based payments     2,065,735       1,859,357  
Enhanced research and development tax credits     1,219,815       1,109,026  
Germany net operating loss carryforwards     545,852       524,093  
U.S. state net operating loss carryforwards     1,160,983       1,298,745  
Transaction costs     142,013        
Accrued expenses     72,503       59,979  
Depreciation     5,070       3,283  
Lease liability     5,475        
Total deferred tax assets before valuation allowance     25,878,322       23,484,898  
Valuation allowance for deferred tax assets     (25,872,847 )     (23,484,898 )
   Net deferred tax assets     5,475        
Deferred tax liabilities:                
Indefinite-lived intangible asset     (2,918,518 )     (2,918,518 )
Right of use asset – leases     (5,475 )      
Total deferred tax liabilities     (2,923,993 )     (2,918,518 )
Net deferred liability   $ (2,918,518 )   $ (2,918,518 )

 

For the years ended December 31, 2019 and 2018, the Company had U.K. net operating loss carryforwards of approximately $52.9 million and $47.3 million, respectively, U.S. federal net operating loss carryforwards of approximately $18.4 million and $16.5 million, respectively, U.S. state net operating loss carryforwards of approximately $18.4 million and $16.2 million, respectively, Germany net operating loss carryforwards of approximately $1.7 million and $1.7 million, respectively, and Switzerland net operating loss carryforwards of approximately $0.3 million and $0 million, respectively. The U.K. and Germany net operating loss carryforwards can be carried forward indefinitely. $5.0 million of the U.S. federal net operating loss carryforwards can be carried forward indefinitely and the remaining U.S. federal and state net operating loss carryforwards begin to expire in 2032.

  

The Company’s ability to use its operating loss carryforwards and tax credits generated in the U.S. to offset future taxable income is subject to restrictions under Section 382 of the U.S. Internal Revenue Code (the “Code”). These restrictions may limit the future use of the operating loss carryforwards and tax credits if certain ownership changes described in the Code occur. Future changes in stock ownership may occur that would create further limitations on the Company’s use of the operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.

 

The Company’s ability to use its operating loss carryforwards and tax credits generated in the U.K. are subject to restrictions under U.K. tax legislation. These regulations may limit the future use of operating loss carryforwards if there is a change in ownership and a change in the nature or conduct of the business carried on by the Company, and in certain circumstances where there is a change in the nature or conduct of the business only. In such cases the carryforwards would cease to be available to set against future income.

 

The Company’s ability to use its operating loss carryforwards and tax credits generated in Germany and Switzerland are also subject to restrictions under German and Swiss tax legislation. These regulations may limit the future use of operating loss carryforwards if there is a change in ownership. In such cases the carryforwards would cease to be available to set against future income.

  

As of December 31, 2019 and 2018, the Company did not record any uncertain tax positions.

 

The Company files income tax returns in the U.S. federal tax jurisdiction and Massachusetts state tax jurisdiction, and certain foreign tax jurisdictions. The Company is subject to examination by the U.S. federal, state, foreign, and local income tax authorities for calendar tax years ending 2014 through 2019 due to available net operating loss carryforwards and research and development tax credits arising in those years. The Company has not been notified of any examinations by the Internal Revenue Service or any other tax authorities as of December 31, 2019. The Company has not recorded any interest or penalties for unrecognized tax benefits since its inception.

 

Potential 382 Limitation

 

The Company’s net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service.  The Company’s ability to utilize its net operating loss (“NOL”) and research and development credit (“R&D”) carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Code, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.  In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.

 

The Company has not completed a study to assess whether one or more ownership changes have occurred since it became a loss corporation as defined in Section 382 of the Code, but the Company believes that it is likely that an ownership change has occurred. If the Company has experienced an ownership change, utilization of the NOL and R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s Common Stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization.  Until a study is completed, and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on the Company’s operating results.

 

From time to time the Company may be assessed interest or penalties by major tax jurisdictions, namely the Commonwealth of Massachusetts. As of December 31, 2019, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date.