NOTE 15. INCOME TAXES

The Company is subject to taxation in the United States, California, New Jersey, Texas and Pennsylvania. The provision for income taxes for the years ended December 31, 2017 and 2016 are summarized below:

Income tax expense for the years ended December 31, 2017 and 2016, are recorded in the general and administrative expenses line item in the accompanying consolidated statements of operations.

A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income taxes to the income tax provision is as follows:

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $7.1 and increased by approximately $7.2 during 2017 and 2016, respectively.

As of December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $62,899 and federal research and development tax credits of approximately $354. Under new tax law, federal NOLs can be carried forward indefinitely for losses incurred after December 31, 2017. Losses incurred prior to the effective date are still subject to the 20 year carryforward. The federal research credits will expire beginning in the year 2026. As of December 31, 2017, the Company had net operating loss carryforwards for state income tax purposes of approximately $59,215 which expire beginning in the year 2017 and state research and development tax credits of approximately $305 which do not expire.

In March 2016, the FASB issued ASU 2016-09, Improvement to Employee Share – Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in income tax provision or in additional paid-in capital. The Company’s deferred tax asset at December 31, 2017 did not include any excess tax benefits from employee stock option exercises, which are a component of the federal and state net operating loss carryforwards and on a go forward basis the excess tax benefits will be recognized as a component of income tax expense.

Utilization of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating losses ad credits before their utilization.

In June 2006, the FASB issued interpretation ASC 740-10-50, Accounting for Uncertainty in Income Tax. This pronouncement clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC 740-10-50, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. ASC 740 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transaction. The Company adopted ASC 740-10-50 effective January 1, 2009. In accordance with ASC 740-10-50, the Company is classifying interest and penalties as a component of tax expense.

The Company did not have any unrecognized tax benefits as of December 31, 2017 and 2016, all of which is offset by a full valuation allowance. These unrecognized tax benefits, if recognized, would not affect the effective tax rate. There was no interest or penalties accrued at the adoption date and at December 31, 2016.

A reconciliation of the change in the UTB balance from January 1, 2017 to December 31, 2017 is as follows:

On December 27, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our consolidated balance sheet. Given the current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the consolidated balance sheet. However, when the Company becomes profitable, it will receive a reduced benefit from such deferred tax assets. The effect of the legislation was a reduction in the deferred tax assets and the corresponding valuation allowance of approximately $8,059.