No provision for income taxes was recorded in the years ended December 31, 2018 and 2017. The Company remains in a cumulative loss position with a full valuation allowance recorded against its net deferred income tax assets as of December 31, 2018.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, reducing the U.S. federal corporate income tax rate. While the Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, ASC 740 required the Company to remeasure its deferred tax balances in 2017 in accordance with the 2018 rate reduction.

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. tax reform for which the accounting under ASC 740 is complete. Specifically, the Company revalued its U.S. deferred tax assets and liabilities due to the federal income tax rate reduction from 35% to 21%. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented.

The Company did not record provision for income taxes for the years ended December 31, 2018 and 2017. The Company’s deferred income tax assets continue to be offset by a valuation allowance. The Company has recorded a reduction of deferred income tax assets of $20.7 million in the year ended December 31, 2017 related to the remeasurement of our net deferred tax assets to reflect the U.S. federal corporate income tax rate reduction to 21%, which was fully offset by a change to the Company’s valuation allowance.

The reconciliation of federal statutory income tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2018			2017
Expected income tax benefit at the federal statutory rate		21.0	%		34.0	%
Federal tax rate change effect		-			(110.3	)
State taxes, net of federal benefit		5.2			5.4
Research and development credit, net		10.3			17.0
Non-deductible items and others		(0.4	)		0.7
Change in valuation allowance		(36.1	)		53.2
Total		0.0	%		0.0	%

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal components of the Company’s deferred tax assets consisted of the following as of December 31, 2018 and 2017 (in thousands):

	As of December 31,
	2018			2017
Deferred tax assets:
Federal and state net operating loss carryforwards	$	52,362		$	45,057
Research and development tax credits		14,592			11,542
Depreciation and amortization		468			504
Reserves and accruals		56			115
Derivative liabilities		-			96
Deferred revenue		-			78
Other		202			330
Total deferred tax assets		67,680			57,722
Less: valuation allowance		(67,680	)		(57,026	)
Net deferred tax assets		-			696
Deferred tax liability:
Debt discount		-			(696	)
Net deferred tax assets and liability	$	-		$	-

The Company’s valuation allowance increased by $10.7 million and decreased by $10.0 million for the years ended December 31, 2018 and 2017, respectively, in order to maintain a full valuation allowance against its deferred tax assets. Based on the Company’s history of losses, the Company recorded a full valuation allowance against its deferred tax assets as of December 31, 2018 and 2017. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support a reversal of the valuation allowance.

As of December 31, 2018, the Company had federal and state operating loss carryforwards of $198.2 million and $209.3 million, which begin to expire in the years ending December 31, 2024 and 2034, respectively. The Company had federal research and development tax credit carryforwards of $14.6 million as of December 31, 2018. This credit begins to expire from in the year ending December 31, 2021.

Under the provisions of Section 382 of the Internal Revenue Code (the IRC), net operating loss and credit carryforwards and other tax attributes may be subject to limitation if there has been a significant change in ownership of the Company, as defined by the IRC. Future owner or equity shifts, including an IPO, could result in limitations on net operating loss and credit carryforwards.

The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. state jurisdictions. The tax years from January 1, 2015 to December 31, 2018 remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized.

The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2018, and 2017, the Company had no unrecognized income tax benefits that would affect the Company’s effective tax rate if recognized.