15. Income Taxes
Tax Rate Reconciliation
The income tax benefit differed from the amounts computed by applying the federal statutory income tax rate of 34% to pretax income from operations as a result of the following:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Income tax benefit at statutory federal rate | $ | (4,176 | ) | $ | (3,723 | ) | ||
| Increase (reduction) in income taxes resulting from: | ||||||||
| Nondeductible expenses | 7 | 7 | ||||||
| Fair value adjustment on convertible notes | — | 2 | ||||||
| State and local income taxes, net of federal income tax benefit | (566 | ) | (505 | ) | ||||
| Federal valuation allowance | 4,169 | 3,714 | ||||||
| State valuation allowance | 566 | 505 | ||||||
| $ | — | $ | — | |||||
Significant Components of Current and Deferred Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
| At December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Deferred rent | $ | 29 | $ | 25 | ||||
| Deferred revenue | — | — | ||||||
| Federal and state net operating loss carryforwards | 17,013 | 10,818 | ||||||
| Stock-based compensation | 9,234 | 4,831 | ||||||
| Compensation accruals and other | (5 | ) | 553 | |||||
| Total deferred tax assets | 26,271 | 16,227 | ||||||
| Valuation allowance | (26,222 | ) | (16,144 | ) | ||||
| Net deferred tax assets | 49 | 83 | ||||||
| Deferred tax liabilities: | ||||||||
| Total deferred tax liabilities | (49 | ) | (83 | ) | ||||
| Net deferred tax asset (liability) | $ | — | $ | — | ||||
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred taxes will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of the deferred tax liabilities including the impact of available carryback and carryforward periods and does not believe it is more-likely-than-not the Company will realize the benefits of the deferred tax assets. Accordingly, a valuation allowance has been recorded against the deferred tax assets. The valuation allowance increased by approximately $10.1 million for the year ended December 31, 2017 and decreased $1.1 million for the year ended December 31, 2016.
At December 31, 2017 and 2016, the Company had federal and state net operating loss carryforwards of $44.1 million and $34.0 million, respectively. The state loss carryforwards began expiring in 2016 and the federal loss carryforwards will begin expiring in 2023, unless previously utilized.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Generally, in addition to certain entity reorganizations, the limitation applies when one or more 5% stockholders increase their ownership, in the aggregate, by more than 50% percentage points over a 36-month time period testing period, or the beginning the day after the most recent ownership change, if shorter. The annual limitation may result in the expiration of net operating losses and credit before utilization.
The Company files a federal income tax return. For taxable years ending before 2012, the Company is no longer subject to U.S. federal examination; however, the Internal Revenue Service has the ability to review years prior to 2014 to the extent the Company utilizes tax attributes carried forward from those prior years. The statute of limitations on the Company’s state filings is four years.