(11)Income Taxes

 

The Company has incurred net operating losses (NOLs) since inception. The Company has not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.

 

The income tax expense benefit differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:

 

 

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31 is presented below:

 

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. In addition, certain limitations imposed under the Internal Revenue Code (IRC) could further limit the Company’s realization of these deferred tax assets in the event of changes in ownership of the Company, as defined by IRC Section 382. Based on the level of historical taxable losses and projections of future taxable income (losses) over the periods in which the deferred tax assets can be realized, management currently believes that it is more likely than not that the Company will not realize the benefits of these deductible differences. Accordingly, the Company has provided a valuation allowance against the gross deferred tax assets as of December 31, 2016 and 2015.

 

The Company’s ability to utilize its net operating loss carryforwards and built-in items of deduction, including capitalized start-up costs and research and development costs, may be substantially limited due to ownership changes that may have occurred or that could occur in the future. These ownership changes may limit the amount of net operating loss carryforwards and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. During 2011, the Company completed an IRC Section 382 review and the results of the review indicated that ownership changes had occurred. While the Company has not completed an IRC Section 382 review since 2011, it believes that it is likely that additional ownership changes have occurred since then. Since the Company has experienced an ownership change, utilization of carryforward attributes are subject to an annual limitation, which is determined by first multiplying the value of the Company’s common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a significant portion of the carryforward attributes before utilization and the permanent loss of built-in items of deduction. Any carryforward attributes that expire prior to utilization or permanent loss of built-in items of deduction as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance.

 

As of December 31, 2016, the Company has generated U.S. federal net operating loss carryforwards of approximately $161.4 million.  Of the total federal net operating loss, $48.0 million will expire unused as a result of the 2011 Section 382 limitation and $221,000 are generated from excess tax benefits not yet recorded to the income tax payable, such that they are not reflected in the deferred tax asset balance.  The federal net operating loss carryforwards expire in the years 2022 through 2036. The Company’s research and development credit carryforwards, if not used, begin to expire in 2024.

 

Net operating loss carryforwards of the Company are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2013. There are no tax examinations currently in progress.