Income Taxes:

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act incorporates broad and complex changes to the U.S. tax code. The main provision of the Tax Act that is applicable to the Company is the reduction of a maximum federal tax rate of 35% to a flat tax rate of 21%, effective January 1, 2018. The Company has incorporated the change in federal tax rates in its annual tax provision. Consequently, the Company has recorded a decrease in net deferred tax assets of $12,658, with a corresponding net adjustment to deferred income tax expense of $12,658. These adjustments are fully offset by a decrease in the valuation allowance for the year ended December 31, 2017. Therefore, the net impact to the Company’s tax expense is $0. The Company has completed and recorded the adjustments necessary under Staff Accounting Bulletin No. 118 related to the Tax Act.

The Company’s 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. The following table represents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:



	December 31,
	2016			2017

Deferred tax assets:
Net operating loss carryforwards	$	31,618		$	21,627
Credit carryforwards	3,200			4,230
Stock-based compensation	1,801			2,806
Accruals and reserves	4,588			3,953
Gross deferred tax assets	41,207			32,616
Valuation allowance	(38,307		)	(29,818		)
Total deferred tax assets, net of valuation allowance	2,900			2,798
Deferred tax liabilities:
Intangible assets	(1,419		)	(847		)
Prepaid expenses	(1,481		)	(1,951		)
Total deferred tax liabilities	(2,900		)	(2,798		)
Net deferred tax assets and liabilities	$	—		$	—

The valuation allowance increased by $11,296 and $6,800, during the years ended December 31, 2015 and 2016, respectively, and decreased by $8,489 during the year ended December 31, 2017.

The following table represents the Company’s NOL carryforwards as of December 31, 2016 and 2017:



	December 31,
	2016	2017

Federal	84,973	87,071
Various states	4,133	4,231

Federal net operating loss carryforwards are available to offset future taxable income and begin to expire in 2025. State net operating loss carryforwards are available to offset future taxable income and begin to expire in 2018. Net operating loss carryforward periods for the various state jurisdictions range from 5 to 20 years. Additionally, net research and development credit carryforwards of $3,200 and $4,230 are available as of December 31, 2016 and 2017, respectively, to reduce future tax liabilities. The research and development credit carryforwards begin to expire in 2026.

Current tax laws impose substantial restrictions on the utilization of research and development credits and NOL carryforwards in the event of an ownership change, as defined by the Internal Revenue Code Section 382 and 383. Such an event may significantly limit the Company’s ability to utilize its net NOLs and research and development tax credit carryforwards. During 2017 the Company completed a Section 382 study. The study determined that the Company underwent an ownership change in 2006. Due to the Section 382 limitation determined on the date of the ownership change in 2006, NOL and R&D credits were reduced by $1,506 and $32, respectively.

The components of loss before provision (benefit) for income taxes for the years ended December 31, 2015, 2016, and 2017 were $(30,236), $(22,526), and $(15,002), respectively.

The reconciliation of the U.S. federal income tax at statutory rate with the Company’s effective income tax rate:



	December 31,
	2015		2016		2017

U.S. federal income tax at statutory rate	34.00	%	34.00	%	34.00	%
State taxes (net of federal benefit)	3.86		2.49		2.40
Permanent differences	(2.94	)	(8.21	)	(15.03	)
Federal research and development credit	2.42		2.06		7.08
Change in valuation allowance	(37.36	)	(30.19	)	(27.79	)
Nondeductible expenses and others	0.02		(0.15	)	(0.66	)
Change in valuation allowance for Tax Act impact	—		—		84.37
Change in deferred balance before valuation allowance for Tax Reform impact	—		—		(84.37	)
Effective income tax rate	—	%	—	%	—	%

Permanent differences consist primarily of stock compensation expense related to incentive stock options in the amounts of (4.90)%, (7.87)%, and (14.74)% for the years ended December 31, 2015, 2016, and 2017, respectively.

The Company did not record any tax benefits for the years ended December 31, 2015, 2016, and 2017. The difference between the U.S. federal income tax at statutory rate of 34% and the Company’s effective tax rate in all periods is primarily due to a full valuation allowance related to the Company’s U.S. deferred tax assets and the change in corporate tax rate effective for tax years beginning after December 31, 2017.

The Company accounts for uncertainty in income taxes in accordance with ASC 740. Tax positions are evaluated in a two-step process, whereby the Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The following table summarized the activity related to unrecognized tax benefits:



	December 31,
	2016		2017

Unrecognized benefit—beginning of year	$	684	$	800
Gross increases (decreases)—prior year tax positions	—		(7		)
Gross increases (decreases)—current year tax positions	116		264
Unrecognized benefit—end of year	$	800	$	1,057

All of the unrecognized tax benefits as of December 31, 2016 and 2017 are accounted for as a reduction in the Company’s deferred tax assets. Due to the Company’s valuation allowance, none of the $800 and $1,057 of unrecognized tax benefits would affect the Company’s effective tax rate, if recognized. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. There was no interest or penalties accrued related to unrecognized tax benefits for 2016 and 2017 and no liability for accrued interest or penalties related to unrecognized tax benefits as of December 31, 2017.

The Company’s material income tax jurisdiction is the United States (federal). As a result of NOL carryforwards, the Company is subject to audit for all tax years for federal purposes. All tax years remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.