Energous Corporation 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, 2016

Note 9 – Income Taxes

As of December 31, 2016, and 2015, the Company’s deferred tax assets (liabilities) consisted of the effects of temporary differences attributable to the following:

	December 31,
	2016		2015
Deferred tax assets (liabilities):
Tax credit	$	2,802,573	$	2,958,771
Net operating loss carryovers		16,174,712		7,511,765
Property and equipment		(58,747)		(98,235)
Research and development costs		18,628,913		10,380,961
Start-up and organizational costs		1,222		1,333
Stock-based compensation		1,829,843		1,175,821
Other accruals		341,090		155,472
Total gross deferred tax assets		39,719,606		22,085,888
Less: valuation allowance		(39,719,606)		(22,085,888)
Deferred tax assets, net	$	-	$	-

The change in the Company’s valuation allowance is as follows:

	2016		2015
January 1,	$	22,085,888	$	9,630,687
Increase in valuation allowance		17,633,718		12,455,201
December 31,	$	39,719,606	$	22,085,888

The Company has federal and state net operating loss carryovers of approximately $44,563,000 and $44,661,000, respectively, available to offset future taxable income. The federal and state NOL carryforwards will expire at various dates beginning in 2033. The Company has federal and state research and development tax credit carryovers of approximately $1,931,000 and $1,321,000, respectively. The federal R&D credit carryovers will expire beginning in 2032 and state R&D credit carryovers do not expire. The ultimate realization of the net operating loss is dependent upon future taxable income, if any, of the Company and may be limited in any one period by alternative minimum tax rules. Although management believes that the Company may have sufficient future taxable income to absorb the net operating loss carryovers and research and development tax credit carryovers before the expiration of the carryover period, there may be circumstances beyond the Company’s control that limit such utilization. Accordingly, management has determined that a full valuation allowance of the deferred tax asset is appropriate at December 31, 2016 and 2015.

Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers when the stock ownership of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased on a cumulative basis by more than 50 percentage points. Management cannot control the ownership changes occurring as a result of public trading of the Company’s Common Stock. Accordingly, there is a risk of an ownership change beyond the control of the Company that could trigger a limitation of the use of the loss carryover. The Company completed a Section 382 analysis as of December 31, 2016, and determined that none of its NOLs or R&D credits would be limited.

	For the Year Ended December 31,
	2016			2015
Tax benefit at federal statutory rate		(34.0)	%		(34.0)	%
State income taxes		(5.7)			(5.5)
Permanent differences:
Stock-based compensation		0.8			1.3
Meals and entertainment		0.1			0.1
True-up of federal deferred taxes		1.7
True-up of state deferred taxes		1.2			(0.2)
Other		-			0.7
Research and development tax credit, federal		(1.5)			(4.4)
Research and development tax credit, state		(1.1)			(3.1)
Increase in valuation allowance, federal		32.9			36.3
Increase in valuation allowance, state		5.6			8.8
Effective income tax rate		0.0	%		0.0	%