NOTE

– INCOME TAXES

Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available carryforwards. Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of

December 31, 2017

and

2016

are as follows (dollars in thousands):

	December 31,
	2017			2016

Deferred tax assets:
Net operating losses	$	59,551		$	74,195
Fixed asset basis difference		4,559			10,662
Contributions carryover		4			5
Deferred compensation		1,352			2,375
Accrued liabilities		971			389

Total deferred tax assets		66,437			87,626

Valuation allowance for deferred tax assets		(66,437	)		(87,626	)

Net deferred tax asset	$	-		$	-

The valuation allowance decreased

$21,189,000

and increased

$7,121,000

2017

and

2016,

respectively. The change in deferred tax assets resulted from current year net operating losses and changes to future tax deductions resulting from terms of stock compensation plans, fixed assets, and accrued liabilities. The

2017

change in deferred tax assets was impacted significantly by the passage of the Tax Cuts and Jobs Act (“TCJA”) enacted in the United States on

December 22, 2017.

One of the effects of the TCJA is to reduce the effective federal corporate tax rate to

21%,

effective

January 1, 2018.

The

2017

deferred tax assets above take into account a remeasurement to the new federal tax rate. The effect to the Company of this new legislation resulted in a reduction in federal deferred tax assets (prior to valuation allowance) of approximately

$30,675,000.

This provision includes a reasonable estimate of the impact of the TCJA on our tax provision following the guidance of SEC Staff Accounting Bulletin

No.

118.

As of

December 31,

201

the Company had net operating loss (NOL) carryforwards of approximately

$286.3

million for federal income tax purposes and

$166.3

million for California income tax purposes. Such carryforwards expire in varying amounts through the year

2036.

Use of the carryforward amounts is subject to an annual limitation as a result of a previous ownership change.

As of

December 31,

201

the Company possessed unrecognized tax benefits totaling approximately

$2.8

million.

None

of these, if recognized, would affect the Company's effective tax rate because the Company has recorded a full valuation allowance against these tax assets.

The Company's tax years

201

through

2017

remain subject to examination by the Internal Revenue Service, and tax years

2013

through

2017

remain subject to examination by California tax jurisdictions. In addition, the Company's loss carryforward amounts are generally subject to examination and adjustment for a period of

three

years for federal tax purposes and

four

years for California purposes, beginning when such carryovers are utilized to reduce taxes in a future tax year.

A reconciliation of the income tax benefit to the statutory federal income tax rate is as follows (dollars in thousands):

	Year Ended December 31,
	201 7			201 6			2015

Expected federal income tax benefit at 34%	$	(11,477	)	$	(8,955	)	$	(8,163	)
Loss with no tax benefit provided		8,156			6,918			7,389
State income tax		4			4			4
Non-deductible expenses and other		3,321			2,037			774

Income tax expense	$	4		$	4		$	4

Because it is more likely than

not

that the Company will

not

realize its net deferred tax assets, it has recorded a full valuation allowance against these

assets. Accordingly,

deferred tax asset has been recorded in the accompanying balance sheet.