Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

13. Income Taxes

As of December 31, 2016, we had net operating loss carryforwards for federal income tax purposes of approximately $247.7 million that expire at various dates through 2035, and federal research and development tax credits of approximately $8.7 million that expire at various dates through 2035. We also had net operating loss carryforwards for California income tax purposes of approximately $124.4 million that expire at various dates through 2035 and state research and development tax credits of approximately $8.5 million which do not expire. Approximately $12.4 million of federal and state net operating loss carryforwards represent stock option deductions arising from activity under our stock option plans, the benefit of which will increase additional paid in capital when realized.

Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an ownership change of a corporation. We have performed a change in ownership analysis through December 31, 2016 and all of our net operating loss and tax credit carryforwards are available to offset future taxable income, if any.

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 and operating loss and credit carryforwards. Significant components of our deferred tax assets are as follows (in thousands):

	December 31,
	2016		2015
Deferred tax assets:
Net operating loss carryforwards	$	87,267	$	91,365
Research credit carryforwards		14,322		13,884
Other, net		2,637		3,417
Deferred revenue		—		—
Total deferred tax assets		104,226		108,666
Valuation allowance		(104,226)		(108,666)
Net deferred tax assets	$	—	$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $4.4 million during 2016, increased by $2.7 million during 2015 and increased by $0.5 million during 2014.

Under ASC 718, the deferred tax asset for net operating losses as of December 31, 2016 excludes deductions for excess tax benefits related to stock based compensation.

The provision for income taxes consists of state minimum taxes due. The effective tax rate of our provision (benefit) for income taxes differs from the federal statutory rate as follows (in thousands):

	Year Ending December 31,
	2016		2015		2014
Computed at 34%	$	1,758	$	(3,840)	$	(839)
State taxes		(187)		(268)		592
Book gains (losses) not currently benefited		(4,439)		2,740		454
Other		659		(20)		235
Revaluation of warrant liability		(280)		1,534		(346)
Research and development credits		(252)		(146)		(97)
Net operating loss carryforward expirations		2,741		—		—
Total	$	—	$	—	$	(1)

We had no unrecognized tax benefits or any amounts accrued for interest and penalties for the three year period ended December 31, 2016. Our policy is to recognize interest and penalties related to income taxes as a component of income tax expense.

We file tax returns in the U.S. federal jurisdiction and some state jurisdictions. We are subject to the U.S. federal and state income tax examination by tax authorities for such years 1998 through 2016, due to net operating losses that are being carried forward for tax purposes.