Note 9. Income taxes

The Company applies FASB ASC topic 740, "Income Taxes" or ASC 740 which addresses the determination of whether tax benefits claimed, or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The Company is generally subject to tax examination for a period of three years after tax returns are filed. Therefore, the statute of limitations remains open for tax years 2016 and forward. However, when a company has net operating loss carryovers, those tax years remain open until three years after the net operating losses are utilized. Therefore, the tax years remain open back to 2004.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

The significant components of deferred income tax assets and liabilities consist of the following:


	December 31,
	2019		2018
	(in thousands)
Deferred Tax Assets:
Net operating loss	$	37,747	$	37,819
Share-based compensation		2,113		1,757
Research and development tax credit		1,947		2,378
Other reserves		2,238		1,270
Finance lease liability		156		390
Operating lease liability		826		208
State deferred		1,518		1,236
Inventory		90		103
Accrued rebates		5,862		4,902
Interest expense carryover		1,143		1,296
Other		914		952
Total deferred tax assets		54,554		52,311
Deferred Tax Liabilities:
Intangible assets		(1,230)		(1,226)
Right-of-use asset		(639)		—
Property and equipment		(873)		(999)
Total deferred tax liabilities		(2,742)		(2,225)
Valuation allowance		51,812		50,086
Net deferred tax asset (liability)	$	—	$	—

At December 31, 2019, the Company had gross federal net operating loss carry-forwards of $280,072,000, of which $34,611,000 have no expiration date; the utilization of these net operating loss carryforwards is limited to 80% of taxable income in any given year. The Company also had federal net operating loss carryforwards of approximately $245,461,000 which begin to expire in 2024. At December 31, 2019, the Company had research and development credits of $2,686,000, which begin to expire in 2024. The Company had tax effected state net operating loss carry-forwards of $2,958,000 and $3,166,000 at December 31, 2019 and 2018, respectively. Utilization of the net operating loss carry-forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company has performed an analysis to determine the impact of any ownership change(s) under Section 382 of the Internal Revenue Code. Due to an ownership change in 2017, the amount of federal net operating loss that will expire unused due to the Section 382 limitation is $98,009,000. The amount of federal research and development credit that will expire unused is $350,000. The deferred tax assets and related valuation allowances for both carryforwards have been reduced accordingly.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company has no accrued interest related to its uncertain tax positions as they all relate to timing differences that would adjust the Company’s net operating loss carryforward, interest expense carryover or research and development credit carryover and therefore do not require recognition. As a result of these timing differences, at December 31, 2019 and 2018, the Company had gross unrecognized tax benefits related to uncertain tax positions of $8,646,000 and $3,956,000, respectively. In 2019, the Company performed an analysis of its historic research and development credits and recorded a new uncertain tax position related to these credits, which is reflected in the chart below. The Company has no other tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within 12 months of the reporting date. Changes in unrecognized benefits in any given year are recorded as a component of deferred tax expense. A tabular rollforward of the Company’s gross unrecognized tax benefits is below:


	December 31,
	2019		2018
	(in thousands)
Beginning Balance	$	3,956	$	7,261
Increase resulting from current period tax positions		6,872		5,458
Decrease resulting from current period tax positions		(2,182)		(8,763)
Ending Balance	$	8,646	$	3,956

The Company has recorded a valuation allowance of $51,812,000 and $50,086,000 at December 31, 2019 and 2018, respectively, to fully reserve its net deferred tax assets. The Company has assessed the likelihood that the deferred tax assets will be realized and determined that it is more likely than not that all of the deferred tax assets 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. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Due to the uncertainty of realizing the deferred tax asset, the Company has placed a valuation allowance against the entire deferred tax asset. The Company may not ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards. The change in the valuation allowance was an increase of $1,726,000 and $11,118,000 for the years ended December 31, 2019 and December 2018, respectively.

The Company has recorded current income tax expense of $11,000 for the year ended December 31, 2019. There was neither income tax expense nor benefit recorded for the year ended December 31, 2018 and 2017. A reconciliation of the Company’s Federal statutory tax rate of 21% to the Company’s effective income tax rate is as follows:


	Year Ended
	December 31,
	2019		2018
U.S. Statutory Tax Rate	21	%	21	%
Change in Valuation Allowance	(10.2)	%	(21.5)	%
State Tax Expense, net	0.9	%	1.8	%
Research and Development Tax Credit	0.9	%	0.5	%
Uncertain Tax Position - Research and Development Tax Credit	(3.4)	%	0	%
Permanent Difference - Interest Expense	(7.8)	%	0	%
Provision to Return, Other Permanent Differences and Other Adjustments	(1.4)	%	(1.8)	%
Income Tax Expense (Benefit)	0	%	0	%