Income Taxes

Fibrocell Science, Inc. and Fibrocell Technologies, Inc. file a consolidated U.S. federal income tax return, and file U.S. state income tax returns in several jurisdictions as well. In general, the U.S. federal and state income tax returns remain open to examination by taxing authorities for tax years beginning in 2013 to present. However, if and when the Company claims net operating loss (NOL) carryforwards from years prior to 2013 against future taxable income, those losses may be examined by the taxing authorities. The Company's foreign subsidiaries file income tax returns in their respective jurisdictions.

The components of the income tax expense (benefit) related to operations, were as follows:



	Year ended December 31,
($ in thousands)	2016		2015
U.S. Federal:
Current	$	—	$	—
Deferred	—		—
U.S. State:
Current	—		—
Deferred	—		—
Income tax expense (benefit)	$	—	$	—

The reconciliation between income tax expense (benefit) at the U.S. federal statutory rate and the amount recorded in the accompanying Consolidated Financial Statements were as follows:



	Year ended December 31,
($ in thousands)	2016			2015
Tax benefit at U.S. federal statutory rate	$	(5,353	)	$	(12,183	)
Increase in domestic valuation allowance	10,162			14,236
State income taxes benefit before valuation allowance, net of federal benefit	(1,160		)	(1,122		)
Warrant revaluation income and other financing costs	(3,742		)	(1,026		)
Credits	(366		)	—
Stock-based compensation	239			292
Return to provision true-ups	220			(40		)
Other	—			(157		)
Income tax expense (benefit)	$	—		$	—

The components of the Company’s net deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows:



	Year ended December 31,
($ in thousands)	2016			2015
Deferred tax liabilities:
Intangible assets	$	—		$	1,764
Convertible notes	4,263			—
Total deferred tax liabilities	$	4,263		$	1,764
Deferred tax assets:
Loss carryforwards	$	85,263		$	77,194
Intangible assets	117			—
Capital loss carryforward	852			840
Property and equipment	1,067			1,096
License fees	7,776			8,351
Accrued expenses and other	549			886
Stock-based compensation	4,059			3,445
Credits	418			—
Total deferred tax assets before valuation allowance	100,101			91,812
Less: valuation allowance	(95,838		)	(90,048		)
Total deferred tax assets	$	4,263		$	1,764
Net deferred tax assets	$	—		$	—

As of December 31, 2016, the Company had generated U.S. net operating loss carryforwards of approximately $219.1 million which expire from 2018 to 2036 and U.S. federal R&D credits of $0.4 million which expire from 2035 to 2036. The NOL carryforwards are available to reduce future taxable income. However, the NOL carryforwards may be, or become subject to, an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This could limit the amount of NOL's that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. If and when the Company utilizes the NOL carryforwards in a future period, it will perform an analysis to determine the effect, if any, of these loss limitation rules on the NOL carryforward balances. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes, therefore, the Company may not be able to take full advantage of these carryforwards for federal income tax purposes. In addition, the Company has NOL carryforwards in certain non-U.S. jurisdictions of approximately $0.3 million. However, it is not expected that these non-U.S. loss carryforwards will ever be utilized, so they are not included in the components of deferred taxes listed above. Finally, there are no unremitted earnings in foreign jurisdictions, so no provision for taxes thereupon is required.

As the Company has had cumulative losses and there is no assurance of future taxable income, valuation allowances have been recorded to fully offset deferred tax assets at December 31, 2016 and 2015. The valuation allowance increased by $5.8 million and $15.9 million during 2016 and 2015, respectively, primarily due to the impact from the current year net losses incurred.