Income Taxes

12 Months Ended

Dec. 31, 2017

11. Income Taxes

No provision for federal income taxes has been recorded for the years ended December 31, 2017 and 2016 due to net losses and the valuation allowance established.

Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

	December 31,
	2017			2016
Deferred tax assets:
Net operating losses	$	45,791		$	57,903
Research and other credits		2,178			2,121
Stock based compensation		1,585			2,164
In-Process research and development		1,375			1,246
Other		676			761
Total deferred tax assets		51,605			64,195

Valuation allowance		(51,605	)		(64,195	)
Net deferred tax assets	$	-		$	-

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 2017 and 2016 is as follows:

	Year Ended December 31,
	2017			2016
Statutory rate		34.0	%		34.0	%
Valuation allowance		57.6	%		(34.8	)%
Deferred tax expense from enacted rate reduction		(98.7	)%		-	%
Nondeductible stock compensation		(0.1	)%		(0.1	)%
Other		7.2	%		0.9	%
Effective tax rate		-	%		-	%

The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, "Income Taxes" ("ASC 740"), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation. After reviewing the Company's inventory of deferred tax assets on the date of enactment and giving consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, the Company's revaluation of its net deferred tax assets resulted in a decrease of $21.6 million and a corresponding reduction in the valuation allowance on net deferred tax assets. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act have not been completed as of December 31, 2017 and, therefore, considers its accounting for the tax effects of the Tax Act on its deferred tax assets to be complete as of December 31, 2017.

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 $12.6 million during 2017 and increased by $10.5 million during 2016.

At December 31, 2017, the Company had federal net operating loss carryforwards of approximately $166 million, which expire in the years 2021 through 2037, and state net operating loss carryforwards of approximately $156 million, which expire in the years 2018 through 2037.

At December 31, 2017, the Company had federal research and development credit carryforwards of approximately $1.3 million, which expire in the years 2022 through 2035 and state research and development credit carryforwards of approximately $2.2 million. The state research and development credit carryforwards can be carried forward indefinitely.

During 2013, the Company completed a Section 382 study in accordance with the Internal Revenue Code of 1986, as amended, and similar state provisions. The study concluded that the Company has experienced several ownership changes since inception. This causes the Company's utilization of its net operating loss and tax credit carryforwards to be subject to substantial annual limitations. These results are reflected in the above carryforward amounts and deferred tax assets. The Company's ability to utilize its net operating loss and tax credit carryforwards may be further limited as a result of subsequent ownership changes. All such limitations could result in the expiration of carryforwards before they are utilized. An ownership change may have occurred during 2015, 2016 and 2017, or all three years and in connection with the Restructuring Transactions described in Note 10. As a result, tax attributes such as net operating losses and research and development credits may be subject to further limitation.

The Company adopted FASB Interpretation ASC 740, Income Taxes (previously Accounting for Uncertainties in Income Taxes - an interpretation of FASB Statement No. 48 ("FIN 48") effective January 1, 2009. FASB ASC 740 requires that the Company recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.

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

Balance at December 31, 2015	$	1,068
Additions based on tax positions related to prior year		(9	)
Additions based on tax positions related to current year		68
Balance at December 31, 2016		1,127
Additions based on tax positions related to prior year		(67	)
Additions based on tax positions related to current year		-
Balance at December 31, 2017	$	1,060

There were no interest or penalties related to unrecognized tax benefits. Substantially all of the unrecognized tax benefit, if recognized to offset future taxable income would affect the Company’s tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Because of net operating loss carryforwards, substantially all of the Company’s tax years remain open to federal tax and state tax examination.

The Company files income tax returns in the U.S. federal jurisdiction and California. Federal and California corporation income tax returns beginning with the 2001 tax year remain subject to examination by the Internal Revenue Service and the California Franchise Tax Board, respectively.