13. Income Taxes

For the years ended December 31, 2019 and 2018, the Company recorded no provision or benefit for income taxes primarily due to losses incurred. The Company has incurred net operating losses for all the periods presented.

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


	Year Ended December 31,
	2019		2018
Tax at statutory federal rate	(21.0)	%	(21.0)	%
State taxes, net of federal benefit	(0.8)		(1.7)
Stock-based compensation	2.0		1.5
Nondeductible executive compensation	—		0.9
Change in valuation allowance	18.9		20.6
Other	0.9		(0.3)
Provision for income taxes	0.0	%	0.0	%

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	29,684	$	25,359
Inventory		874		1,442
Accruals		430		760
Depreciation and amortization		143		88
Limitation on business interest		186		96
Stock-based compensation		546		1,416
Right of use liability		776		—
Gross deferred tax assets		32,639		29,161
Valuation allowance		(31,840)		(29,073)
Deferred tax assets		799		88
Deferred tax liabilities:
Right of use asset		(710)		—
Other		(89)		(88)
Deferred tax liabilities		(799)		(88)
Net deferred tax assets	$	—	$	—

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of December 31, 2019 and 2018. The net valuation allowance increased by $2.8 million in 2019.

As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $131.8 million, of which $99.8 million will begin to expire in the year of 2028 through 2037 if not utilized, and $32.0 million will carryover indefinitely. In addition, the Company had state net operating loss carryforwards of approximately $50.2 million, of which $48.5 million will begin to expire in 2023 through 2039 if not utilized, and $1.7 million will carryover indefinitely.

The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act and codified under IRC Section 382) that could limit the Company’s ability to utilize these carryforwards. Should the limitation apply, the related net operating loss deferred tax asset and the valuation allowance would be reduced by the same amount.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years beginning in 2008, due to the accumulated net operating losses that are carried forward.

The Company has not identified any unrecognized tax benefits as of December 31, 2019 and 2018. The Company does not expect the amount of unrecognized tax benefits to materially change in the next twelve months.