NOTE 15. INCOME TAXES

The components of the pretax loss from operations for the years ended December 31, 2016, 2015 and 2014, are as follows (in thousands):



Components of the Pretax Loss From Operations
(in thousands)
	12/31/2016			12/31/2015			12/31/2014
U.S. Domestic	$	(48,539	)	$	(44,415	)	$	(30,933	)
Foreign	(17,568		)	(1,083		)	—
Pretax loss from operations	$	(66,107	)	$	(45,498	)	$	(30,933	)

The components of the provision for income taxes is presented in the following table:



Provision for Income Taxes
(in thousands)
	12/31/2016		12/31/2015		12/31/2014
Current:
Federal	$	—	$	—	$	—
State	—		—		—
Foreign	267		—		—
Total current provision	267		—		—
Deferred:
Federal	—		—		—
State	—		—		—
Foreign	—		—		—
Total deferred provision	—		—		—
Total provision	$	267	$	—	$	—

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 net deferred income taxes for the years ended December 31, 2016, and 2015, are as follows (in thousands):



Deferred Income Tax Components
(in thousands)
	12/31/2016			12/31/2015
Deferred tax assets:
Net operating loss carryforward	$	42,013		$	28,584
Property & equipment	690			339
Inventory	1,735			864
Stock options	7,208			5,208
Intangible assets, definite-lived	220			333
General business credit	3,984			1,915
Deferred revenue	370			372
Other	121			205
Valuation allowance	(56,341		)	(37,820		)
Deferred tax assets	$	—		$	—

As of December 31, 2016, the Company has generated regular tax federal net operating losses of approximately $125.1 million. The Company's ability to realize tax benefit from the net operating loss is subject to annual limitation under Internal Revenue Code Section 382. Due to the change in control which occurred as a result of Abeja Ventures, LLC’s investment in the Company on June 26, 2012, the Company estimates that the annual Section 382 limitation on utilization of net operating losses generated prior to the transaction will be $420,000. As such, the Company will never get the benefit of $4.2 million of the net operating losses generated prior to June 26, 2012. The deferred tax asset has been adjusted to reflect the Section 382 limitation. Section 382 also applies to built-in losses at the time of the transaction. The amounts of any unrealized built-in losses or gains were not calculated at the date of the transaction. The net operating losses available for future use are approximately $120.9 million. For federal purposes, net operating losses can be carried forward for up to 20 years. The Company’s federal net operating losses will begin to expire in 2023.

The Company relocated its headquarters to Arizona in January 2013. As of December 31, 2016, the Company has generated Arizona net operating losses of approximately $102.5 million. The Company's Arizona net operating losses will begin to expire in 2033.

The net deferred tax asset valuation allowance is $56.3 million as of December 31, 2016, compared to $37.8 million as of December 31, 2015. The valuation allowance is based on management’s assessment that it is more likely than not that the Company will not have taxable income in the foreseeable future.

Under current GAAP, in a classified statement of financial position, deferred tax assets and liabilities are separated into current amounts and a non-current amounts on the basis of the classification of the related assets or liabilities for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. On November 20, 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes which requires noncurrent classification of all deferred tax assets and liabilities for all public entities for annual periods beginning after December 15, 2016. Accounting Standards Update 2015-17 also provides for early adoption for all entities as of the beginning of an annual period. For the year ended December 31, 2015, the Company elected to early adopt Accounting Standards Update 2015-17 and presents all of its deferred tax assets and liabilities as non-current for the periods ended December 31, 2016, and 2015. The Company has applied the Standard on a prospective basis. Therefore, the classification of deferred tax assets and liabilities in periods prior to the period ended December 31, 2015 have not been changed from the original presentation.

The Company began commercialization of its products in Europe in 2016 and has subsidiaries in the Netherlands, France, Germany, Italy, Spain and the United Kingdom. The Company intends to treat earnings from its foreign subsidiaries as permanently reinvested. As of December 31, 2016, there would be no US tax effect of a repatriation of the earnings of its foreign subsidiaries, due to the Company’s loss position.

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate for years ending December 31, 2016, 2015 and 2014, is as follows:



Effective Tax Rate
	12/31/2016		12/31/2015		12/31/2014
U.S. federal statutory income tax rate	(34.00	)%	(34.00	)%	(34.00	)%
State taxes, net of federal tax benefit	(1.69	)	(2.93	)	(3.20	)
Permanent and other differences	(0.17	)	0.11		—
Change in tax rates	0.67		—		—
Tax rate differential	8.62		0.42		—
Unrecognized tax benefits	1.09		0.40		—
Nondeductible equity and other compensation	1.17		2.86		3.70
Limitation on net operating losses due to §382	—		—		0.50
Credit for increased research activities	(3.31	)	(2.67	)	(0.80	)
Change in Valuation allowance	28.02		35.81		33.80
	0.40	%	—	%	—	%

At December 31, 2016, the Company had uncertain tax positions of $1.1 million, determined as follows (in thousands):



Uncertain Tax Positions
(in thousands)
	12/31/2016		12/31/2015		12/31/2014
Balance at beginning of year	$	343	$	161	$	—
Increases for prior positions	37		—		78
Increases for current year positions	721		182		83
Other Increases	—		—		—
Decreases due to settlements	—		—		—
Expiration of the statute of limitations for the assessment of taxes	—		—		—
Other Decreases	—		—		—
Balance at end of year	$	1,101	$	343	$	161

These uncertain positions are not expected to change within the next twelve months. Of the $1.1 million of uncertain tax positions, $57,000 would impact the effective tax rate, if reversed. The Company accounts for interest on uncertain tax positions within tax expense. The Company's foreign subsidiaries are subject to applicable jurisdiction examination for all years of operations. The Company did not accrue interest or penalties for these uncertain tax positions as of December 31, 2016.

The Company has incurred federal net operating losses dating to the tax year ended July 31, 2004. As such, all loss carryovers are subject to adjustment under IRS and state examination, depending on the jurisdiction in which they were incurred. In 2016, the IRS began an examination of the Company’s 2014 income tax return. Management does not believe the examination will result in a material change to its tax position.