Note 14 - Income Taxes

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

14

.  Income Taxes

Prior to the Merger, the Company was treated as a partnership for federal income tax purposes.

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.  A deferred tax liability of

$3.6

million was recorded for the basis differences associated with indefinite-lived in-process R&D assets. In

August

2016,

the Company abandoned future development efforts for the IPR&D asset associated with RES-

440

and recorded an impairment charge of

$1.0

million which is equal to its acquired value. Upon recognizing the impairment, the Company recognized an income tax benefit of

$0.4

million and reduced the carrying value of the related deferred tax liability as of

December

31,

2016

(See Note

4).

Significant components of the Company's deferred tax assets for federal income taxes as of

December

31,

2016

consisted of the following:

Deferred tax assets	December 31, 2016
Net operating loss carryforwards	$	7,547,296
Stock option compensation		2,720,186
Orphan Drug credits		1,218,069
Capitalized start-up costs and other		4,690,843
Valuation allowance		(16,176,394	)
Net deferred tax asset	$	—
Deferred tax liabilities
Intangible assets		(3,279,363	)
Net deferred tax liability	$	(3,279,363	)

The changes in the valuation allowance that occurred during

2016

were as follows:

Valuation allowance at beginning of year	$	—
Changes recorded to income tax provision		5,017,047
Changes recorded in purchase accounting		11,159,347
Valuation allowance at end of year	$	16,176,394

The Company does not have unrecognized tax benefits as of

December

 

31,

2016.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

The Company had net operating loss carryforwards (“NOL”) for federal and state income tax purposes at

December

31,

2016

of approximately:

Combined NOL Carryforwards:	December 31, 2016
Federal	$	19,842,612
State	$	20,222,492

Upon completion of the Merger, the Company acquired the net operating losses for federal and state income tax purposes which RestorGenex has incurred since inception. The Tax Reform Act of

1986

(the “Act”) provides for limitation on the use of net operating loss following certain ownership changes (as defined in the Act) that could limit the Company’s ability to utilize these carryforwards. The Company experienced an ownership change as a result of the Merger.

The net operating loss carryforwards begin expiring in

2034

for federal income tax purposes and for state income tax purposes. In

January

2016,

the number of outstanding shares of RestorGenex common stock increased in connection with the Merger discussed in note

4.

This increase in the number of shares outstanding resulted in a change of ownership, under the provisions of Internal Revenue Code Section

382

and similar state provisions, and limits the Company’s ability to utilize these net operating loss carryforwards to offset future income. The amounts above reflect the amount of NOLs that the Company expects to be able to utilize as a result of the limitation. The Company recorded a

100%

valuation allowance of the deferred tax assets as of

December

31,

2016,

because of the uncertainty of their realization.

A reconciliation of income tax benefit at the statutory federal income tax rate and income taxes as reflected in the financial statements as of

December

31,

2016

is as follows:

Rate reconciliation:	December 31, 2016
Federal tax benefit at statutory rate		(34.0	) %
State tax, net of Federal benefit		(2.3	)
Litigation settlement charge		4.6
Acquisition costs		2.8
Orphan drug credit		(4.4	)
Change in valuation allowance		27.2
Stock compensation		4.2
Other		(0.1	)
Total provision		(2.0	) %

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s

2013

to

2015

tax years remain open and subject to examination.