No provision for U.S. federal, state or foreign income taxes has been recorded as the Company has incurred net operating losses since its inception in
1997.
Significant components of the Company’s deferred tax assets and liabilities consist of the following:
| | | December 31, |
| | | 2015 | | 2016 |
| U.S. federal and state net operating loss carryforwards | | $ | 74,268,811 | | | $ | 89,445,428 | |
| Foreign net operating loss carryforwards | | | 1,451,968 | | | | 1,526,207 | |
| Contribution carryforwards | | | 4,245 | | | | 4,245 | |
| Research and development credits | | | 6,748,213 | | | | 7,705,933 | |
| Investment tax credits | | | 29,433 | | | | 30,363 | |
| Share-based compensation | | | 847,475 | | | | 1,586,780 | |
| Other accruals | | | 710,248 | | | | 917,376 | |
| Deferred revenue | | | 365,896 | | | | 1,120,772 | |
| Property and equipment | | | 476,297 | | | | 257,192 | |
| Total deferred tax assets | | | 84,902,586 | | | | 102,594,296 | |
| Valuation allowance for deferred assets | | | (84,902,586 | ) | | | (102,594,296 | ) |
| Net deferred tax assets | | $ | — | | | $ | — | |
As of
December
31,
2015
and
2016,
the Company provided a full valuation allowance against its net deferred tax assets since as of that time, the Company could not assert that it was more likely than not that these deferred tax assets would be realized. There was an increase in the valuation allowance in the year ended
December
31,
2016
of
$17,691,710,
all of which was allocable to current operating activities.
As of
December
31,
2016,
the Company had U.S. federal and state, and Canadian federal and provincial net operating loss carryforwards of
$246,143,600,
$290,665,700,
$5,660,400,
and
$5,660,400,
respectively. These net operating loss carryforwards begin to expire in
2018,
2017,
2026
and
2026,
respectively. As of
December
31,
2016,
the Company also had unlimited Luxembourg net operating loss carryforwards of
$124,800.
As of
December
31,
2016,
the Company had U.S. federal and state tax credit carryforwards of
$7,481,300
and
$340,400,
respectively. These credit carryforwards begin to expire in
2020
and
2024,
respectively. As of
December
31,
2016,
the Company had Canadian investment tax credit carryforwards of
$30,400
that begin to expire in
2024.
The utilization of the net operating loss and tax credit carryforwards
may
be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code, and state and foreign tax laws. Section
382
of the Internal Revenue Code of
1986,
as amended, imposes annual limitations on the utilization of net operating loss (“NOL”) carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change
may
result from transactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than
50
percentage points over a
three
-year testing period. The Company believes that it experienced an ownership change during
2014
under Section
382.
Due to the Section
382
limitation resulting from the ownership change,
$28,156,600
of its U.S federal net operating losses are expected to expire unused. Additionally, the Company’s U.S. federal tax credits and state net operating losses
may
be limited. The amount of U.S. federal net operating losses expected to expire due to the Section
382
limitation has been derecognized in our consolidated financial statements as of
December
31,
2016.
The Company
may
also experience ownership changes in the future as a result of subsequent shifts in its stock ownership. As a result, if the Company reports net taxable income, the Company’s ability to use its pre-change net operating loss carry-forwards and other tax credit carryforwards to offset U.S. federal taxable income
may
be subject to limitations, which potentially could result in increased future tax liability to the Company.
As of
December
31,
2016,
the Company had no foreign unremitted earnings from its foreign subsidiaries.
Taxes computed at the statutory U.S. federal income tax rate of
34.0%
are reconciled to the provision for income taxes for the years ended
December
31,
2014,
2015
and
2016
as follows:
| | | 2014 | | 2015 | | 2016 |
| | | Amount | | Percent of Pretax Earnings | | Amount | | Percent of Pretax Earnings | | Amount | | Percent of Pretax Earnings |
| U.S. federal tax statutory rate | | $ | (18,124,019 | ) | | | 34.0 | % | | $ | (25,428,097 | ) | | | 34.0 | % | | $ | (18,029,558 | ) | | | 34.0 | % |
| State taxes (net of federal benefit) | | | (1,707,912 | ) | | | 3.2 | % | | | (1,936,719 | ) | | | 2.6 | % | | | (1,034,566 | ) | | | 2.0 | % |
| U.S. federal research and development tax credits | | | (1,701,727 | ) | | | 3.2 | % | | | (2,135,940 | ) | | | 2.9 | % | | | (1,368,171 | ) | | | 2.6 | % |
| Other nondeductible expenses | | | 658,740 | | | | (1.1 | %) | | | 1,032,480 | | | | (1.4 | %) | | | 760,287 | | | | (1.5 | %) |
| Increase in unrecognized tax benefits | | | 510,516 | | | | (1.0 | %) | | | 640,782 | | | | (0.9 | %) | | | 410,451 | | | | (0.8 | %) |
| Change in effective state tax rate | | | 1,685 | | | | (0.0 | %) | | | 1,190,519 | | | | (1.6 | %) | | | 1,655,991 | | | | (3.1 | %) |
| Expiration of NOL & contribution carryforwards | | | 77,391 | | | | (0.1 | %) | | | 9,590,101 | | | | (12.8 | %) | | | — | | | | (0.0 | %) |
| Change in valuation allowance | | | 20,252,063 | | | | (38.1 | %) | | | 16,705,784 | | | | (22.3 | %) | | | 17,691,710 | | | | (33.4 | %) |
| Deferred tax asset true-ups | | | 33,263 | | | | (0.1 | %) | | | 341,090 | | | | (0.5 | %) | | | (86,144 | ) | | | 0.2 | % |
| Provision for income taxes | | $ | — | | | | 0.0 | % | | $ | — | | | | 0.0 | % | | $ | — | | | | 0.0 | % |
On
September
18,
2015,
North Carolina enacted House Bill
97,
which reduced the corporate income tax rate from
5%
to
4%
in
2016.
As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in
2015
by applying the lower rate, which resulted in a decrease in the deferred tax assets and a corresponding decrease to the valuation allowance of
$1,190,519.
On
August
4,
2016,
North Carolina issued a notice in accordance with House Bill
97
confirming that the corporate income tax rate would be further reduced from
4%
to
3%
in
2017.
As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in
2016
by applying the lower rate, which resulted in a decrease in the deferred tax assets and a corresponding decrease to the valuation allowance of
$1,655,991.
The Company had gross unrecognized tax benefits of
$2,795,000
as of
January
1,
2016.
As of
December
31,
2016,
the total gross unrecognized tax benefits were
$3,206,300
and of this total, none would affect the Company’s effective tax rate if recognized. The Company does not anticipate a significant change in total unrecognized tax benefits or the Company’s effective tax rate due to the settlement of audits or the expiration of statutes of limitations within the next
12
months.
The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of
December
31,
2015
and
2016,
the Company had no accrued interest or penalties related to uncertain tax positions.
The Company has analyzed its filing positions in all significant federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to United States federal, state, and local tax examinations by tax authorities for years before
2013
although carryforward attributes that were generated prior to
2013
may
still be adjusted upon examination by the Internal Revenue Service if they either have been or will be used in a future period. No income tax returns are currently under examination by taxing authorities.
The following is a tabular reconciliation of the Company’s change in gross unrecognized tax positions during the years ended
December
31,
2014,
2015
and
2016:
| | | 2014 | | 2015 | | 2016 |
| Beginning balance | | $ | 1,644,500 | | | $ | 2,155,000 | | | $ | 2,795,800 | |
| Gross increase for tax positions related to current periods | | | 474,300 | | | | 640,800 | | | | 410,500 | |
| Gross (decrease) increase for tax positions related to prior periods | | | 36,200 | | | | — | | | | — | |
| Ending balance | | $ | 2,155,000 | | | $ | 2,795,800 | | | $ | 3,206,300 | |