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 2014 to present. However, if and when the Company claims net operating loss (NOL) carryforwards from years prior to 2014 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)	2017		2016
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)	2017			2016
Tax benefit at U.S. federal statutory rate	$	(5,684	)	$	(5,353	)
Increase in domestic valuation allowance	5,914			10,162
State income taxes benefit before valuation allowance, net of federal benefit	561			(1,160		)
Warrant revaluation income and other financing costs	(898		)	(3,742		)
Credits	(904		)	(366		)
Stock-based compensation	61			239
Return to provision true-ups	127			220
Capital loss carryforward expiration	817			—
Impact of federal rate change	34,463			—
Impact of federal rate change on valuation allowance	(34,463		)	—
Other	6			—
Income tax expense (benefit)	$	—		$	—

The components of the Company’s net deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:



	Year ended December 31,
($ in thousands)	2017			2016
Deferred tax liabilities:
Convertible notes	$	2,821		$	4,263
Total deferred tax liabilities	$	2,821		$	4,263
Deferred tax assets:
Loss carryforwards	$	60,428		$	85,263
Intangible assets	68			117
Capital loss carryforward	—			852
Property and equipment	606			1,067
License fees	4,419			7,776
Accrued expenses and other	401			549
Stock-based compensation	2,753			4,059
Credits	1,436			418
Total deferred tax assets before valuation allowance	70,111			100,101
Less: valuation allowance	(67,290		)	(95,838		)
Total deferred tax assets	$	2,821		$	4,263
Net deferred tax assets	$	—		$	—

As of December 31, 2017, the Company had generated U.S. net operating loss carryforwards of approximately $237.9 million which expire from 2018 to 2037 and U.S. federal R&D credits of $1.4 million which expire from 2033 to 2037. 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, 2017 and 2016. The valuation allowance decreased by $28.5 million in 2017, which was partly due to a $34.4 million decrease due to the reduction of the federal corporate tax rate and partly due to a $5.9 million increase primarily due to the impact of the net losses incurred in 2017. The valuation allowance increased by $5.8 million in 2016, primarily due to the impact of the net losses incurred during that year.

As of December 22, 2017, the United States enacted tax reform legislation “known as H.R. 1”, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA or the “Act”), resulting in significant modifications to existing law. Among other changes, the TCJA permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35% effective for tax years beginning after December 31, 2017. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. As a result of this revaluation, the Company incurred $34.5 million income tax expense in continuing operations with a corresponding reduction in the valuation allowance. Therefore, there was no impact on the Company’s consolidated statements of operations or statements of financial position from the reduction in the federal tax rate. The other provisions of the TCJA did not have a material impact on the consolidated financial statements.

In response to the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, the Company has recorded a provisional estimate in these financial statements for the effect of the corporate tax rate change. The effect of the change in federal corporate tax rate from 35% to 21% is subject to change based on resolution of estimates used in determining the amounts of deferred tax assets and liabilities that were remeasured.