The Company has had net operating losses since inception and, therefore, has not been subject to federal income taxes. As of December 31, 2016, the Company has accumulated approximately $1.4 million of research and development tax credits. As of December 31, 2016, the Company had approximately $250.8 million of NOL carryforwards for federal income tax purposes. Additionally, approximately $12.2 million of NOLs and approximately $838,000 of research and development tax credits will expire in 2018. The NOLs will expire from 2018 through 2036. The research and development credits will expire from 2018 through 2022.
The Tax Reform Act of 1986 provided for a limitation on the use of NOL and tax credit carryforwards following certain ownership changes that could limit the Company’s ability to utilize these NOLs and tax credits. The limitation is generally referred to as the “section 382 limit” after the IRC section. The issuance of stock, together with changes in stock ownership, resulted in multiple ownership changes for federal income tax purposes. During 2013, the Company completed an analysis of its section 382 limit. Based on this analysis, the Company concluded that the amount of NOL carryforwards and the credits available to offset taxable income is limited under section 382. Accordingly, if the Company generates taxable income in any year in excess of its then annual limitation, the Company may be required to pay federal income taxes even though it has unexpired NOL carryforwards. Additionally, because U.S. tax laws limit the time during which NOLs and tax credit carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take full advantage of its NOLs and tax credit carryforwards for federal income tax purposes. Future public and private stock placements may create additional limitations on the Company’s NOLs, credits and other tax attributes.
The Company’s net operating losses from inception to date have resulted principally from costs incurred in conducting clinical trials and in research and development activities related to efforts to develop products and from the associated administrative costs required to support those efforts. The Company has recorded a deferred tax asset for its net operating losses; however, as the Company has incurred operating losses since inception, and since there is no certainty of future profits, a valuation allowance has been provided in full on the deferred tax assets in the accompanying consolidated financial statements.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):
| | | December 31, | |
| | | 2016 | | 2015 | |
| Net operating loss carryforwards | | $ | 85,263 | | $ | 80,127 | |
| Research and development tax credits | | | 1,384 | | | 1,384 | |
| Inventory reserve | | | 1,510 | | | 1,510 | |
| Total deferred tax assets | | | 88,157 | | | 83,021 | |
| Less — Valuation allowance | | | (88,157) | | | (83,021) | |
| Net deferred tax assets | | $ | — | | $ | — | |
The Company adopted ASC 740-10 in 2007. The Company has no unrecognized tax benefits that should be accrued under ASC 740-10. The Company’s policy is to record interest and penalties on income taxes as a component of the income tax provision.
The Company’s only taxing jurisdictions are the United States, Texas and the United Kingdom. The Company’s tax years from 1998 to the present remain open for federal examination due to the net operating loss carryforwards. Texas has a four year statute of limitations so that returns filed since 2012 remain open for state examination.