9. Income Taxes

The Company accounts for uncertain tax positions in accordance with Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). The application of income tax law and regulations is inherently complex. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the Company’s subjective assumptions and judgments can materially affect amounts recognized in its financial statements.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the balance sheet at December 31, 2017. The Company has an uncertain tax position of $1.9 million related to California net operating losses at December 31, 2017. The Company is subject to taxation in the United States and state jurisdictions, and the Company’s tax years beginning 2007 to date are subject to examination by taxing authorities.

On December 22, 2017, President Trump signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). The effects of the new federal legislation are recognized upon enactment, which is the date the president signs a bill into law. The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction takes effect on January 1, 2018. As a result of this rate change, the Company has revalued its deferred tax assets at December 31, 2017. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to faxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Based on currently available information, the Company recorded a reduction of approximately $7.9 million in the fourth quarter of 2017 related to the revaluation of its deferred tax assets, which did not result in additional tax expense in the quarter as the Company’s deferred tax assets have a full valuation allowance. This amount may be subject to further adjustment in subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified.

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the years ended December 31, 2017 and 2016:

	December 31,
	2017			2016
	(%)			(%)
Federal statutory rate		34			34
Warrant liability FMV adjustment		(8	)		6
Stock issuance costs	—				(5	)
Research and development credits		3			3
Removal of net operating loss and other credits		33			(33	)
Impact of federal tax rate change		(65	)	—
Stock compensation and other permanent items		3			(5	)
Effective income tax rate	—			—

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Until this analysis has been completed, the Company has removed the deferred tax assets for net operating losses of approximately $15.9 million and a research and development credit of approximately $3.0 million generated through December 31, 2017 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits accordingly. The Company does not expect this analysis to be completed within the next twelve months and, as a result, the Company does not expect that the unrecognized tax benefits will change within twelve months of this reporting date. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Significant components of the Company’s deferred tax assets at December 31, 2017 and 2016 are as follows:

	December 31,
	2017			2016
Acquired technology	$	103,000		$	201,000
Stock compensation expense		490,000			539,000
Accruals and other		216,000			130,000
Total deferred tax assets		809,000			870,000
Less valuation allowance		(809,000	)		(870,000	)
Net deferred tax assets	$	—		$	—

At December 31, 2017, the Company has federal and California net operating loss carryforwards of approximately $61.9 million and $41.7 million, respectively. The federal and California loss carryforwards begin to expire in 2027 and 2017, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $2.0 million and $1.2 million, respectively. The federal research credit carryforwards will begin expiring in 2027 unless previously utilized. The California research credit will carry forward indefinitely. Furthermore, under recently enacted U.S. tax legislation, although the treatment of tax losses generated before December 31, 2017 has generally not changed, tax losses generated in calendar year 2018 and beyond may only offset 80% of our taxable income. This change may require us to pay federal income taxes in future years despite generating a loss for federal income tax purposes in prior years.

A summary of the changes in the amount of unrecognized tax benefits (excluding interest and penalties) for 2017 and 2016 are as follows:

	2017		2016
Beginning balance of unrecognized tax benefits	$	1,961,595	—
Additions based on tax positions of prior years	—		$	1,961,595
Ending balance of unrecognized tax benefits	$	1,961,595	$	1,961,595

Due to the full valuation allowance that the Company has on the deferred tax assets, there are no unrecognized tax benefits that would impact the effective tax rate, if recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. To date, as no benefit has been taken related to the uncertain tax position, there have been no interest and penalties recognized.