| 12. | Income Taxes |
On December 22, 2017, the Tax Cuts and Jobs Act (2017 Tax Act) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 34% to 21%, for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the implementation of a territorial tax system, a one-time transition tax on certain foreign earnings, the acceleration of depreciation for certain assets placed into service after September 27, 2017 and other prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
Pursuant to the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company has not finalized its accounting for the income tax effects of the 2017 Tax Act. This includes a provisional amount related to the re-measurement of deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally 21% plus the applicable state tax rate, with a corresponding change to the valuation allowance as of December 31, 2017. The impact of the 2017 Tax Act may differ from this estimate during the one-year measurement period due to, among other things, further refinement of the Company’s calculation, changes in interpretations and assumptions the Company has made, additional guidance that may be issued and actions the Company may take as a result of the 2017 Tax Act.
The components of the net deferred tax assets are as follows at December 31:
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
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Operating loss carryforwards |
$ | 34,173 | $ | 44,219 | ||||
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Tax credit carryforwards |
1,195 | 1,195 | ||||||
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Other temporary differences |
4,064 | 5,707 | ||||||
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| 39,432 | 51,121 | |||||||
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Less valuation allowance |
(39,432 | ) | (51,121 | ) | ||||
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Net deferred tax asset |
$ | — | $ | — | ||||
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The primary factors affecting the Company’s income tax rates were as follows:
| 2017 | 2016 | |||||||
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Tax benefit at U.S. statutory rates |
(34% | ) | (34% | ) | ||||
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State tax benefit |
(3.8% | ) | (3.7% | ) | ||||
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Permanent differences |
1.7% | 2.3% | ||||||
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Impact of the 2017 Tax Act |
113.1% | — | ||||||
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Other |
(4.9% | ) | — | |||||
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Expiring state NOL’s |
— | 1.6% | ||||||
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Changes in valuation allowance |
(72.1% | ) | 33.8% | |||||
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| 0% | 0% | |||||||
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As of December 31, 2017, the Company has federal and state net operating loss carryforwards totaling $136,202,000 and $94,255,000 respectively, which expire through 2036. The net operating losses include Federal and State excess benefits related to stock options of $1,414,000 that will be charged to additional paid-in capital when utilized. In addition, the Company has federal and state research and development credits of $998,000 and $196,000, respectively, which expire through 2034. Ownership changes, as defined by Section 382 of the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Past and subsequent ownership changes could further affect the limitation in future years. Because of the Company’s limited operating history and its recorded losses, management has provided, in each of the last two years, a 100% valuation allowance against the Company’s net deferred tax assets.
The Company is subject to taxation in the U.S. and various states. Based on the history of net operating losses all jurisdictions and tax years are open for examination until the operating losses are utilized or the statute of limitations expires. As of December 31, 2017 and 2016, the Company does not have any significant uncertain tax positions.