Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

13. Income Taxes

As of December 31, 2018, we had federal net operating loss carryforwards of approximately $256.1 million that expire at various dates through 2037 and $7.5 million which do not expire but are subject to 80% taxable income limitations. As of December 31, 2018, we had federal research and development tax credits of approximately $8.8 million that expire at various dates through 2038. We also had net operating loss carryforwards for California income tax purposes of approximately $107.8 million that expire at various dates through 2038 and state research and development tax credits of approximately $9.0 million which do not expire.

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 under Internal Revenue Code Section 382 and 383. We have performed a change in ownership analysis through December 31, 2018 and expect our net operating loss and tax credit carryforwards to be 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,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	62,863		$	62,295
Research credit carryforwards		15,886			15,873
Other, net		1,321			1,705
Total deferred tax assets		80,070			79,873
Valuation allowance		(80,070	)		(79,873	)
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 increased by $0.2 million during 2018, decreased by $24.4 million during 2017 and decreased by $4.4 million during 2016.

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,
	2018			2017			2016
Computed at 21%	$	(1,879	)	$	(4,832	)	$	1,758
State taxes		(167	)		(157	)		(187	)
Change in valuation allowance		197			(28,555	)		(4,439	)
Other		121			388			659
Revaluation of warrant liability		(30	)		(210	)		(280	)
Research and development credits		144			(250	)		(252	)
Net operating loss carryforward expirations		975			1,007			2,741
Impact of 2017 Tax Act		—			32,609			—
Impact of IRC 162m		639			—			—
Total	$	—		$	—		$	—

We had no unrecognized tax benefits or any amounts accrued for interest and penalties for the three year period ended December 31, 2018. Our policy is to recognize interest and penalties related to income taxes as a component of income tax expense. We do not expect the amount of unrecognized tax benefits will materially change in the next twelve months.

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 1999 through 2018, due to net operating losses that are being carried forward for tax purposes.

The Tax Cuts and Jobs Act (“2017 Tax Act”) was enacted in December 2017. The 2017 Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign earnings. We revalued our deferred tax assets as of December 31, 2018 based on a U.S. federal tax rate of 21%, which resulted in a reduction to our deferred tax assets of $32.6 million fully offset by a reduction to the valuation allowance.