Income Taxes

The components of the Company’s loss before income taxes are as follows (in thousands):



	Year Ended December 31,
	2018		2017
Domestic	(16,835	)	(22,717	)
Foreign	(618	)	(322	)
Loss before income taxes	(17,453	)	(23,039	)

The components of income tax expense are as follows (in thousands):



	Year Ended December 31,
	2018			2017
Current tax expense:
Federal	$	—		$	—
State	—			—
Foreign	—			—
Total current tax expense	—			—

Deferred tax expense:
Federal	3,555			(9,574		)
State	822			2,061
Foreign	200			—
Total deferred tax expense	4,577			(7,513		)
Change in deferred tax valuation allowance	(4,577		)	7,513

Net deferred tax expense	—			—
Provision for income taxes	$	—		$	—

Income tax expense differs from the amount computed by applying the statutory federal income tax rate due to the following:



	Year Ended December 31,
	2018		2017
Tax at statutory federal rate	(21.0	)%	(34.0	)%
State tax, net of federal benefit	(5.3	)%	(4.3	)%
Measurement of deferred taxes as a result of tax reform	—	%	68.7	%
Tax credits	(0.7	)%	(0.3	)%
Change in deferred tax valuation allowance	26.2	%	(32.6	)%
Other	0.8	%	2.5	%
Total income tax expense	—	%	—	%

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are presented below (in thousands):



	December 31,
	2018			2017
Net operating loss carryforwards	$	35,067		$	32,210
Research and development credits	2,255			2,070
Depreciation and amortization	132			179
Accruals and reserves	2,958			1,376

	40,412			35,835
Less: Valuation allowance	(40,412		)	(35,835		)
Total deferred tax asset	$	—		$	—

The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding realization of such assets. The following table summarizes changes in the valuation allowance for the year ended December 31, 2018 and 2017 (in thousands):



	December 31,
	2018		2017
Beginning balance	$	35,835	$	43,348
Additions during the period	4,577		—
Deductions during the period	—		(7,513		)
Ending balance	$	40,412	$	35,835

As of December 31, 2018, the Company had net operating loss (“NOL”) carryforwards of approximately $135.5 million and $109.9 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. If not utilized, the Company’s federal net operating loss carryforward begins to expire in 2029, and the state net operating loss carryforward begins to expire in 2019.

As of December 31, 2018, the Company had credit carryforwards of approximately $1.7 million and $1.9 million available to reduce future taxable income, if any, for both federal and state income tax purposes, respectively. The federal credits begin to expire in 2030, and the state credits have no expiration date.

The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code (California has similar laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. The Company has not utilized any NOL carryovers through December 31, 2018. In addition, the Company’s deferred tax assets are subject to full valuation allowance, and thus no benefit for deferred tax assets have been recorded. The Company has determined that it experienced Section 382 ownership changes in 2010 and $1.4 million of its NOLs are limited. The Company is currently performing an analysis to determine whether any additional NOL carryforwards are limited due to a change in ownership as a result of its recent IPO.

The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return. The changes in the Company’s uncertain income tax positions for the years ended December 31, 2018 and 2017 consisted of the following (in thousands):



Beginning balance as of January 1, 2017	$	950
Increases in balances related to tax positions taken during 2017	43
Ending balance as of December 31, 2017	993
Increases in balances related to tax positions taken during 2018	91
Ending balance as of December 31, 2018	$	1,084

The Company has elected to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The Company has accrued zero at December 31, 2018 and 2017 for payment of interest related to unrecognized tax benefits. None of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate at December 31, 2018.

The Company currently has no federal or state tax examinations in progress nor has it had any federal or state examinations since inception. As a result of the Company’s net operating loss carry forwards, all of its tax years are subject to federal and state tax examinations.

On December 22, 2017, the United States enacted a law commonly known as the Tax Cuts and Jobs Act (“TCJA”) which makes widespread changes to the Internal Revenue Code, including a reduction in the federal corporate tax rate to 21%, effective January 1, 2018.

The Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The carrying value of U.S. deferred taxes is determined by the enacted U.S. corporate income tax rate. Consequently, the reduction in the U.S. corporate income tax rate impacts the carrying value of deferred tax assets. Under the new corporate income tax rate of 21%, the U.S. net deferred tax asset position decreased by approximately $15.8 million. Uncertainty regarding the impact of tax reform remains, as a result of factors including future regulatory and rulemaking processes, the prospects of additional corrective or supplemental legislation, potential trade or other litigation, and other factors.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the tax effect of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act’s enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that its accounting for certain income tax effects of the 2017 Tax Act is incomplete, but the Company is able to determine a reasonable estimate, the Company must record a provisional estimate in its consolidated financial statements. If the Company cannot determine a provisional estimate to be included in its consolidated financial statements, the Company should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act. It is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the 2017 Tax Act. The Company has analyzed the guidance and other necessary information related to the tax effects of the 2017 Tax Act and considers the accounting of its net deferred tax assets complete in accordance with SAB 118.