Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

The Company’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. The Company recognized no material adjustments for unrecognized income tax benefits. Through December 31, 2016, the Company had no unrecognized tax benefits or related interest and penalties accrued.

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



	December 31,
	2016			2015
Deferred tax assets:
Net operating losses	$	20,587,955		$	20,350,451
Research and development credits	1,840,505			1,814,296
Deferred rent	11,902			15,599
Accrued compensation	90,936			438,351
Stock-based compensation	2,169,070			1,500,520
Basis difference in tangible and intangible assets	6,174,163			207,157
Total deferred tax assets	30,874,531			24,326,374
Less valuation allowance	(30,874,531		)	(24,326,374		)
Net deferred tax asset	$	—		$	—

For the year ended December 31, 2016, the Company increased the valuation allowance by $6.5 million to fully reserve for the value of deferred tax assets. Due to continued operating losses, there is no indication that it is more likely than not that the Company will be able to utilize its deferred tax assets.

As of December 31, 2016 the Company had $52.2 million of federal and Maryland state net operating loss (“NOL”) carryforwards that will begin to expire in 2031. As of December 31, 2016 the Company had $1.8 million and $57,000 of federal and Maryland state research and development credits, respectively, that will begin to expire in 2018. The NOL and research and development credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders 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 NOLs and research and development credits that the Company can utilize annually to offset future taxable income or tax liabilities. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the NOL carryforwards are subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation, which could be significant, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance. Subsequent ownership changes may further affect the limitation in future years. All of the Company’s tax years are currently open to examination by each tax jurisdiction in which the Company is subject to taxation.

A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:



	December 31,
	2016		2015
Federal statutory rate	34.00	%	34.00	%
Permanent differences	(0.02	)%	(0.02	)%
Warrants	0.15	%	4.26	%
State taxes	3.44	%	5.12	%
Research and development credit	2.18	%	2.69	%
Other	—	%	0.03	%
Change in valuation allowance	(39.75	)%	(46.08	)%
Effective income tax rate	—	%	—	%