11.INCOME TAXES

 

The Company has incurred net operating losses for the years ended December 31, 2017, 2016, and 2015, therefore has no provision for income taxes recorded for such years. For the years ended December 31, 2017, 2016, and 2015, the Company generated losses before taxes in the United States of $39.9 million, $40.6 million and $37.6 million, respectively and no foreign income or losses. The Company’s deferred tax assets are offset by a full valuation allowance.

 

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

 

 

The tax effects of temporary differences and carryforwards that give rise to significant portions of the 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 $7.1 million in the year ended December 31, 2017, due to an increase of $16.4 million in total deferred tax assets due to the increase in net operating loss carryforwards generated during the year, a decrease in the deferred tax assets related to the reduction of the U.S. corporate income tax rate from the 2017 Tax Act of $22.5 million and a decrease of $1.0 million due to the adoption of ASU No. 2016-09. The valuation allowance increased by $15.3 million and $12.7 million in the years ended December 31, 2016, and 2015, respectively, and there were no releases of the valuation allowance in any of these years.

 

The adoption of ASU No. 2016‑09 requires excess tax benefits and tax deficiencies be recorded in the statement of operations as opposed to additional paid‑in capital when the awards vest or are settled, and has been applied on a prospective basis with no impact on the financial statements as of December 31, 2017. As a result of the adoption, the Company's increased its total NOLs by $1.0 million on January 1, 2017 related to deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting purposes. This amount is fully offset by the Company’s valuation allowance.

 

The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries as of 2017, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has not completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals. However, the Company has reasonably estimated the effects of the 2017 Tax Act to be zero as of December 31, 2017 for the following reasons. Due to the Company not having foreign subsidiaries, the mandatory one-time tax on accumulated foreign earnings is not applicable to the Company. The remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35% results in no effect to the Company's provision for income taxes due to the full valuation allowance recorded on deferred tax assets.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the tax effect of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act’s enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that its accounting for certain income tax effects of the Tax Act is incomplete, but the Company is able to determine a reasonable estimate, the Company must record a provisional estimate in its consolidated financial statements. If the Company cannot determine a provisional estimate to be included in its consolidated financial statements, the Company should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Tax Act. In subsequent periods, but within the measurement period, the Company will analyze that guidance and other necessary information to refine its estimates and complete its accounting for the tax effects of the Tax Act as necessary.

 

As of December 31, 2017, the Company had net operating loss (“NOL”) carryforwards (before tax effects) for federal and state income tax purposes of $171.0 million and $124.8 million, respectively. These federal and state NOL carryforwards will begin to expire in 2026 and 2027, respectively, if not utilized. In addition, the Company has federal and state research and development tax credit carryforwards of $1.1 million and $1.5 million, respectively, to offset future income tax liabilities. The federal research and development tax credits will begin to expire in 2026, if not utilized, while the state research and development tax credit can be carried forward indefinitely.

 

Federal and California tax laws impose substantial restrictions on the utilization of net operating losses and credit carry-forwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. Due to ownership changes since inception, the Company’s net operating losses may be limited as to their usage. In the event the Company has additional changes in ownership, utilization of the carryforwards could be further restricted.

 

A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):

 

 

The unrecognized tax benefits, if recognized, would not have an impact on the Company’s effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company does not expect a material change to its unrecognized tax benefits over the next twelve months.

 

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. Management determined that no accrual for interest and penalties was required as of December 31, 2017, 2016, and 2015, respectively.

 

The Company’s tax years 2005-2016 will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any NOL or research and development credits.