NOTE 10:Income Taxes

There was no income tax expense or benefit for the years ended December 31, 2017 or 2016 because of net losses during those years. These net losses were generated from domestic operations.



Based on the available objective evidence and uncertainty about the timing and amount of any future profits, the Company has provided a full valuation allowance against our net deferred tax assets at December 31, 2017 and 2016.  

The components of net deferred tax assets at December 31, 2017 and 2016 were as follows:









The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2017 and 2016 was as follows:







As of December 31, 2017, the Company had pre-tax net operating loss carryforwards of approximately $71,000,000 for federal and $173,000,000 for state tax purposes.  If not utilized, these carryforwards begin to expire in 2027 for federal purposes and 2018 for state purposes. In 2018, approximately $12,000,000 of the Company’s state net operating loss will expire. As of December 31, 2016, we had a net operating loss of approximately $59,000,000 for federal and $167,000,000 for state tax purposes.

The Company’s ability to use net operating loss and tax credit carryforwards may be restricted due to ownership change limitations, as required by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), as well as similar state provisions. These ownership changes may also limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

We believe that Section 382 ownership changes occurred as a result of our follow-on public offerings in 2011, 2013 and 2015. Any limitation may result in the expiration of a portion of the net operating loss and credit carryforwards before utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of our valuation allowance. Due to the existence of a valuation allowance, it is not expected that such limitations, if any, will have an impact on our results of operations or financial position.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent. In the year ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in its U.S. federal statutory rate from 34 percent to 21 percent. The rate change is effective on January 1, 2018; therefore, the Company’s U.S. statutory tax rate for the fiscal year ended December 31, 2018, will be 21 percent.

At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on existing deferred tax balances. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Securities and Exchange Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts. The final transitional impacts of the Act may differ from the initial estimates.



Provisional amounts



Deferred tax assets and liabilities: Certain domestic-related deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally 21 percent. As a valuation allowance is recorded for the full amount of these deferred tax assets and liabilities, the remeasurement of the deferred tax assets and liabilities was offset by a corresponding remeasurement of the valuation allowance. 

We believe that it is more likely than not that the benefit from certain deferred tax assets will not be realized due to the history of our operating losses. In recognition of this risk, we have provided a valuation allowance on the deferred tax assets relating to these assets.  The valuation allowance was $23,000,000 and $31,000,000 at December 31, 2017 and 2016, respectively. The decrease of $8,000,000 between 2017 and 2016 is primarily due to adjustments to the domestic deferred tax assets related to the net operating losses and the change in the federal income tax rate from 34% to 21% under the Act.

The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company has not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2017, the Company’s federal returns for the years ended 2014 through the current period and most state returns for the years ended 2013 through the current period are still open to examination. In addition, all of the net operating loss carryforwards and research and development credits generated in years earlier than 2014 and 2013, respectively, are still subject to Internal Revenue Service audit. The federal and California tax returns for the year ended December 31, 2016 reflect research and development carryforwards of $5,430,000 and $5,317,000, respectively. The Company has recognized additional deferred tax assets for federal and California research and development credits of $46,000 and $35,000 for the year ended December 31, 2017, respectively. 

As of December 31, 2017, our gross unrecognized tax benefits are approximately $10,828,000 which are attributable to research and development credit carryforwards.  A reconciliation of the change in the Company’s unrecognized tax benefits is as follows:





The increase for the year ended December 31, 2017 relates to a position taken in the current year.  The increase for the year ended December 31, 2016 is related to tax positions taken during 2016 and prior years.  If the $11,000,000 of unrecognized income tax benefit is recognized, approximately $11,000,000 would impact the effective tax rate in the period in which each of the benefits is recognized.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months. We recognize interest and penalties related to unrecognized tax benefits within the interest expense line and other expense line, respectively, in the consolidated statement of operations and comprehensive loss. We have not recorded any interest or penalties as a result of uncertain tax positions as of December 31, 2017 and 2016. Accrued interest and penalties would be included within the related liability in the consolidated balance sheet.