ARGOS THERAPEUTICS INC - 10-K filing on 2015-03-31

Note 6 - Income Taxes

12 Months Ended

Dec. 31, 2014

6. Income Taxes

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,
	2013			2014
U.S. federal and state net operating loss carryforwards	$	41,359,722		$	59,689,264
Foreign net operating loss carryforwards		1,827,221			1,743,603
Contribution carryforwards		3,055			4,245
Research and development credits		4,061,844			5,253,055
Investment tax credits		38,175			35,108
Stock-based compensation		22,282			462,796
Patents and other intangibles		2,967			611
Other accruals		97,157			125,614
Deferred revenue		—			372,040
Property and equipment		532,316			510,466

Total deferred tax assets		47,944,739			68,196,802
Valuation allowance for deferred assets		(47,944,739	)		(68,196,802	)

Net deferred tax assets	$	—		$	—

As of December 31, 2013 and 2014, 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, 2014 of $20,252,063, all of which was allocable to current operating activities.

As of December 31, 2014, the Company had U.S. federal and state, and Canadian federal and provincial net operating loss carryforwards of approximately $158,406,400, $176,699,700, $6,579,600, and $6,579,600, respectively. These net operating loss carryforwards begin to expire in 2018, 2017, 2015 and 2015, respectively. As of December 31, 2014, the Company had U.S. federal and state tax credit carryforwards of approximately $5,028,400 and $340,400, respectively. These credit carryforwards begin to expire in 2020 and 2019, respectively. As of December 31, 2014, the Company had Canadian investment tax credit carryforwards of approximately $35,100 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. If the Company has undergone a Section 382 ownership change, an annual limitation would be imposed on certain of the Company’s tax attributes, including NOL and capital loss carryforwards, and certain other losses, credits, deductions or tax basis. As of December 31, 2014, the Company has not completed a formal study to determine whether there are 382 limitations that apply.

As of December 31, 2014, the Company had no foreign unremitted earnings from DC Bio, its Canadian subsidiary.

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, 2012, 2013 and 2014 as follows:

	December 31, 2011						December 31, 2012						December 31, 2014
	Amount			Percent of Pretax Earnings			Amount			Percent of Pretax Earnings			Amount			Percent of Pretax Earnings
U.S. federal tax statutory rate	$	(3,560,252	)		34.0	%	$	(8,133,331	)		34.0	%	$	(18,124,019	)		34.0	%
State taxes (net of federal benefit)		(476,446	)		4.5	%		(789,412	)		3.3	%		(1,707,912	)		3.2	%
U.S. federal research and development tax credits		—			0.0	%		(1,262,562	)		5.3	%		(1,701,727	)		3.2	%
Nondeductible interest expense		(1,782,830	)		17.0	%		(132,546	)		0.6	%		—			0.0	%
Other nondeductible expenses		(210,790	)		2.0	%		419,934			(1.8	%)		658,740			(1.1	%)
Expiration of capital loss carryforward		3,246,049			(31.0	%)		—			(0.0	%)		—			0.0	%
Increase in unrecognized tax benefits		—			0.0	%		378,769			(1.6	%)		510,516			(1.0	%)
Change in effective state tax rate		—			0.0	%		1,349,062			(5.6	%)		1,685			(0.0	%)
Expiration of NOL & contribution carryforwards		57,538			(0.5	%)		6,630			(0.0	%)		77,391			(0.1	%)
Change in valuation reserves		2,618,552			(25.2	%)		8,811,127			(36.8	%)		20,252,063			(38.1	%)
Deferred tax asset true-ups		108,179			(0.8	%)		(647,671	)		2.6	%		33,263			(0.1	%)

Provision for income taxes	$	—			0.0	%	$	—			0.0	%	$	—			0.0	%

The research and development credit, which had previously expired on December 31, 2011, was reinstated as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2013. As a result, the Company adjusted its deferred tax assets in 2013 for the 2012 and 2013 research and development credits, net of the gross unrecognized tax benefit, which resulted in an increase to the deferred tax assets and a corresponding increase to the valuation allowance of approximately $298,000 and $585,700, respectively.

On July 23, 2013, the State of North Carolina enacted House Bill 998, which reduced the corporate income tax rate from 6.9% in 2013 to 6% in 2014 and to 5% in 2015. As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in 2013 by applying the lower rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $1,349,100.

The Company had gross unrecognized tax benefits of approximately $1,644,000 as of January 1, 2014. As of December 31, 2014, the total gross unrecognized tax benefits were approximately $2,155,000 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, 2013 and 2014, 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 2011 although carryforward attributes that were generated prior to 2011 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, 2012, 2013 and 2014:

	2012			2013		2014
Beginning balance	$	1,272,800		$	1,265,700	$	1,644,500
Gross increase for tax positions related to current periods		—			378,800		474,300
Gross (decrease) increase for tax positions related to prior periods		(7,100	)		—		36,200

Ending balance	$	1,265,700		$	1,644,500	$	2,155,000