10. Income Taxes

The income tax provision for the years ended December 31, 2018 and 2017 was $0 and $0, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets at December 31, 2018 and 2017 are summarized below (in thousands):



	December 31,
	2018		2017
Temporary differences	$	111	$	36
Credits		5,330		1,536
Stock compensation		2,630		3,067
Net operating loss carryforwards		15,365		7,715
Total deferred tax assets before valuation allowance		23,436		12,354
Valuation allowance		(22,696)		(11,491)
Total deferred tax assets after valuation allowance		740		863
Technology deferred tax liability		(740)		(863)
Net deferred tax assets	$	—	$	—

In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. At December 31, 2018 and 2017, management was unable to determine that it was more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.

The Company’s effective tax rate is different from the federal statutory tax rate of 21% due primarily to net losses that receive no tax benefit as a result of a valuation allowance recorded for such losses.

Presented below is the reconcilement of the difference between the tax rate computed by applying the U.S. federal statutory tax rate and the effective tax rate for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
	2018		2017		2016
U.S. federal statutory tax rate	(21.0)	%	(35.0)	%	(35.0)	%
Valuation allowance	28.0		23.0		42.0
Tax reform	(2.0)		18.0		—
Permanent differences	2.0		1.0		2.0
State tax benefit and other	(7.0)		(7.0)		(9.0)
Effective tax rate	—	%	—	%	—	%

At December 31, 2018, the Company had federal and California state net operating loss carryforwards of approximately $51.6 million and $51.0 million, respectively. The federal and state net operating loss carryforwards will begin to expire after 2034. At December 31, 2018, the Company had approximately $1.4 million and $1.2 million of federal and California R&D credits, respectively. The federal R&D credits begin to expire after 2035 and the California R&D credits have an indefinite carryforward period.

These net operating loss carryforward and research and development credits amounts have full valuation allowances against them due to the remoteness of their expected utilization.

The Company’s activity related to unrecognized tax benefits are summarized below (in thousands):


	December 31,
	2018		2017
Balance at the beginning of the year	$	512	$	213
Gross increases - tax positions in prior periods		—		37
Gross decreases - tax positions in prior periods		—		—
Gross increases - tax position in current period		365		262
Settlements		—		—
Lapses in statutes of limitations		—		—
Balance at the end of the year	$	877	$	512

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next twelve months. During the years ended December 31, 2018, 2017 and 2016, no interest or penalties were required to be recognized related to unrecognized tax benefits. Although the Company is not under examination, the tax years for 2014 and forward are subject to examination by United States tax authorities.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legistration contains several key tax provisions that affected the Company, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as remeasuring the Company’s U.S. deferred tax assets and liabilities as well as reassessing the net realizability of the Company’s deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, the Company previously provided a provisional estimate of the effect of the Tax Act in our financial statements.

The key impact of the Tax Act on the Company’s financial statement for the year ended December 31, 2017, was the re-measurement of deferred tax balances to the new corporate tax rate. In order to calculate the effects of the new corporate tax rate on the Compnay’s deferred tax balances, ASC 740 “Income Taxes” (“ASC 740”) required the re-measurement of the Company’s deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances are expected to reverse in the future. The re-measurement of the Company’s deferred tax balances resulted in a net reduction in deferred tax assets of $4.7 million offset with a corresponding adjustment to the valuation allowance. In the fourth quarter of 2018, the Company completed its analysis to determine the effect of the Tax Act and recorded no adjustments as of December 31, 2018.

The Company performed a formal analysis of the availability of these operating loss carryforwards at December 31, 2017 under Internal Revenue Code Sections 382 and 383, and management expects that the Company’s ability to use its net operating loss carryforwards may be limited in future periods.