10.         INCOME TAXES

The components of the provision for income taxes for the year ended December 31, 2017, 2016 and 2015, are as follows (in thousands):

 

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

 

Deferred income taxes reflect the 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 as of December 31, 2017 and 2016 (in thousands):

 

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended December 31, 2017, 2016 and December 31, 2015. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future growth. On the basis of this evaluation, as of December 31, 2017 and 2016, a full valuation allowance has been recorded against Company’s net deferred tax asset. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of which are uncertain. The valuation allowance decreased by approximately $12.6 million during the year ended December 31, 2017, and increased by approximately $40.7 million and $9.1 million during the years ended December 31, 2016 and 2015, respectively. The decrease in the valuation allowance in the year ended December 31, 2017 primarily relates to the re-measurement of the deferred tax assets and liabilities due to the U.S. government’s enactment of comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, as discussed below.

The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%,  effective January 1, 2018. The Company is able to determine a reasonable estimate of certain effects of the TCJA and has therefore recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities. As a result, the Company has recorded a decrease related to net deferred tax assets of $35.6 million, with an offsetting change in valuation allowance of $35.6 million for the year ended December 31, 2017. The Securities and Exchange Commission has provided accounting and reporting guidance that allows the Company to report provisional amounts within a measurement period of up to one year from the date of enactment due to the complexities inherent in adopting the TCJA. The ultimate impact may differ from provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA.

At December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $149.4 million that expire beginning in 2030 if not utilized, federal research and development tax credit carryforwards of approximately $4.4 million that expire beginning in 2027 if not utilized, and foreign tax credit carryforwards of approximately $1.2 million that expire in 2027 if not utilized. In addition, the Company had net operating loss carryforwards for California income tax purposes of approximately $88.3 million that expire beginning in 2030 if not utilized, and state research and development tax credit carryforwards of approximately $4.6 million which can be carried forward indefinitely. The Company had other state net operating losses of approximately $1.9 million that begin to expire in 2025. The Company had approximately $0.1 million of minimum tax credit carryovers for California income tax purposes. The minimum tax credits have no expiration date.

The future utilization of net operating loss and tax credit carryforwards and credits may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has previously completed a study in order to assess whether any ownership changes had arisen through December 31, 2014.  As a result of the study, it was determined that the Company experienced an ownership change, as defined in Section 382, during May 2008.  As a result of the analysis, it was determined that approximately $1.0 million of net operating losses and $49,000 of credit carryovers generated through May 2008 would expire prior to being utilized.  No other ownership changes were identified through December 31, 2014. The Company is currently updating its Section 382 analysis but this analysis was not completed by year end.  Preliminarily, it appears that there may be  an additional ownership change  in January 2016 which would impose further annual limitations on the utilization of operating loss and credit carryforwards. Due to the existence of the valuation allowance, limitations under Section 382 and 383 will not impact the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $8.6 million, $3.5 million and $2.9 million as of December 31, 2017, 2016 and 2015, respectively.

The Company has elected to include interest and penalties as a component of tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company did not recognize accrued interest and penalties related to unrecognized tax benefits. Although the timing and outcome of an income tax audit is highly uncertain, the Company does not anticipate that the amount of existing unrecognized tax benefits will change significantly during the next 12 months.

The Company files income tax returns in the U.S. federal, California, Maryland, Massachusetts, New Hampshire, New Jersey and Oregon tax jurisdictions. Due to the Company’s net operating loss and tax credit carryforwards, the income tax returns remain open to U.S. federal and California state tax examinations. The Company is not currently under examination in any tax jurisdiction.