13. Income Taxes
As of December 31, 2016, the Company had net operating loss carryforwards for federal income tax reporting purposes of $190,121,000, which begin to expire in 2026, and California and various other state net operating loss carryforwards of $122,519,000 and $41,751,000, respectively, which will continue to expire in 2017. California net operating loss carryforwards of $1,744,000 will expire in 2017. California and various other state net operating loss carryforwards of $120,775,000 and $41,751,000, respectively, will expire from 2028 through 2036. In addition, as of December 31, 2016, the Company had federal research and development tax credit carryforwards of $2,087,000, which begin to expire in 2026, and state research and development tax credit carryforwards of $2,235,000, which have no expiration date.
The Company’s ability to utilize its federal and state net operating loss carryforwards and federal and state tax credit carryforwards to reduce future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that may have resulted in a change in ownership as defined by Internal Revenue Code (“IRC”) Section 382. In the event that the Company has such a change in ownership, the Company’s utilization of these carryforwards could be severely restricted and could result in the expiration of a significant amount of these carryforwards prior to the Company recognizing their benefit. The Company completed a Section 382 analysis as of December 31, 2013 and concluded that $493,000 in federal net operating loss carryforwards and $151,000 in federal research and development tax credit carryforwards are expected to expire prior to utilization as a result of the Company’s previous ownership changes and corresponding annual limitations. The Company has not, however, conducted a Section 382 study for any periods subsequent to December 31, 2013, and as such, the Company cannot provide any assurance that a change in ownership within the meaning of the IRC has not occurred since that date.
As of December 31, 2016, deferred tax assets of $80,004,000, arising primarily as a result of the Company’s net operating loss carryforwards, tax credits and certain costs capitalized for tax purposes, were fully offset by a valuation allowance. The valuation allowance increased by $11,035,000, $15,241,000 and $18,459,000 during the years ended December 31, 2016, 2015 and 2014, respectively. The deferred tax asset balances as of December 31, 2016 and 2015 excluded excess tax benefits from stock option exercises of $2,096,000 and $2,096,000, respectively.
The temporary timing differences that give rise to the deferred tax assets are as follows (in thousands):
|
|
|
DECEMBER 31, |
|
|||||
|
|
|
2016 |
|
|
2015 |
|
||
|
Components of deferred taxes: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
71,329 |
|
|
$ |
62,255 |
|
|
Research and development tax credits |
|
|
2,670 |
|
|
|
2,418 |
|
|
Other, net |
|
|
6,005 |
|
|
|
4,296 |
|
|
Net deferred tax assets |
|
|
80,004 |
|
|
|
68,969 |
|
|
Less valuation allowance |
|
|
(80,004 |
) |
|
|
(68,969 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company had no deferred tax liabilities as of December 31, 2016 and 2016.
The Company recognized no income tax expense and received no benefit from income taxes during the years ended December 31, 2016, 2015 and 2014. The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the difference for each year summarized below:
|
|
|
DECEMBER 31, |
|
|||||
|
|
|
2016 |
|
|
2015 |
|
||
|
Federal tax benefit at statutory rate |
|
|
34 |
% |
|
|
34 |
% |
|
State tax benefit, net of federal benefit |
|
|
4 |
|
|
|
5 |
|
|
Interest expense |
|
|
(1 |
) |
|
|
(1 |
) |
|
Share-based compensation expense |
|
|
(1 |
) |
|
|
(2 |
) |
|
Other |
|
|
(1 |
) |
|
|
— |
|
|
Adjustment due to change in valuation allowance |
|
|
(35 |
) |
|
|
(36 |
) |
|
Provision for income taxes |
|
|
— |
% |
|
|
— |
% |
As of December 31, 2016, the Company had unrecognized tax benefits of $1,083,000. The unrecognized tax benefits, if recognized, would not impact the Company’s effective tax rate as the recognition of these tax benefits would be offset by changes in the Company’s valuation allowance. The Company does not believe there will be any material changes in its unrecognized tax position during the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
2016 |
|
|
2015 |
|
||
|
Balance at January 1 |
|
$ |
982 |
|
|
$ |
853 |
|
|
Increase related to prior year tax positions |
|
|
— |
|
|
|
— |
|
|
Increase related to current year tax positions |
|
|
101 |
|
|
|
129 |
|
|
Balance at December 31 |
|
$ |
1,083 |
|
|
$ |
982 |
|
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for 2006 through 2015 due to unutilized net operating loss carryforwards and research and development tax credit carryforwards.