Fortress Biotech, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2015

16. Income Taxes

The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carryforwards (“NOL”) in the accompanying consolidated financial statements and has established a full valuation allowance of $ 66.7 million against its deferred tax assets.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The significant components of the Company’s deferred tax assets consisted of the following:

	As of December 31,
	2015		2014
Deferred tax assets:
Net operating loss carryforwards	$	54,249	$	38,974
Amortization of up-front fees		4,442		2,668
Amortization of in-process R&D		599		525
Stock compensation		8,158		4,512
Accruals and reserves		210		518
Tax Credits		4,583		3,856
Unrealized loss on investments		358		-
Total deferred tax assets		72,599		51,053
Less valuation allowance		(66,730)		(50,567)
Net deferred tax assets	$	5,869	$	486

Deferred tax liabilities:
Unrealized gain on investment	$	-	$	(486)
Basis in subsidiary		(5,869)
Total deferred tax assets, net	$	-	$	-

A reconciliation of the statutory tax rates and the effective tax rates is as follows:

	For the Year Ended December 31,
	2015			2014			2013
Percentage of pre-tax income:
U.S. federal statutory income tax rate		35	%		35	%		35	%
State taxes, net of federal benefit		5	%		5	%		4	%
Credits		1	%		6	%		4	%
Non-deductible items		-	%		(1)	%		(2)	%
Other		-	%		-	%		(1)	%
Change in valuation allowance		(44)	%		(45)	%		(40)	%
Change in subsidiary basis		3	%		-	%		-	%
Effective income tax rate		-	%		-	%		-	%

Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management has considered the Company’s history of cumulative net losses incurred since inception and concluded that it is more likely than not that the Company will not realize the benefits of the net deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2015 and 2014. Management reevaluates the positive and negative evidence at each reporting period.

At December 31, 2015, the Company had federal net operating loss carryforwards of $ 141.0 million which expire beginning in the year 2026 and state net operating loss carryforwards of $ 100.5 million which expire beginning in the year 2023.

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that approximately $66.7 million valuation allowance at December 31, 2015 is necessary to reduce the net deferred tax assets to the amount that will more likely than not be realized. The valuation allowance changed by a net $16.2 million during the current year. An increase in valuation allowance of $23.7 million was recorded in deferred tax expense and a reduction in the valuation allowance of $7.5 million related to the non-controlling interest in subsidiaries was recorded in Additional Paid-In Capital.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “IRC”), and similar state provisions. The Company recently performed a detailed analysis under Section 382 of the IRC to determine whether any ownership changes had occurred. The effect of an ownership change would be the potential imposition of annual limitations on the use of net operating loss carryforwards attributable to periods before the change. The detailed analysis confirmed that Section 382 ownership changes occurred on April 26, 2010 and June 27, 2012, causing an annual limitation on the utilization of net loss carryforwards. Based on the analysis of the net loss carryforwards subject to the annual limitation, the Company has concluded that the annual limitation would not prevent the Company from utilizing all of its net loss carryforwards before expiration. Approximately $ 0.5 million of the federal net operating loss carryforward and $0.3 million of the state net operating loss carryforward will result in an increase to additional paid-in capital if and when these carryforwards are used to reduce federal and state income taxes payable.

As of December 31, 2015, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company would classify interest and penalties related to uncertain tax positions in income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2015. The tax years 2007 through 2015 remain open to examination by one or more major taxing jurisdictions to which the Company is subject due to the net operating loss carried forward. In December 2015, Checkpoint Therapeutics experienced an ownership change as a result of an issuance of its common stock. Utilization of the Checkpoint’s net operating loss may be subject to a substantial annual limitation due to ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Associated with the stock issuance, a deferred tax liability of $7.5 million was recorded.