12. Income Taxes

For the years ended December 31, 2018 and 2017, the Company recorded no provision or benefit for income taxes primarily due to losses incurred. The Company has incurred net operating losses for all the periods presented.

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


	Year Ended December 31,
	2018		2017
Tax at statutory federal rate	(21.0)	%	(34.0)	%
State taxes, net of federal benefit	(1.7)		(1.4)
Stock-based compensation	1.5		(0.8)
Nondeductible executive compensation	0.9		—
Change in valuation allowance	20.6		(34.2)
Federal tax rate change	—		70.2
Other	(0.3)		0.2
Provision for income taxes	(0.0)	%	(0.0)	%

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


	December 31,
	2018		2017
Deferred tax assets:
Net operating loss carryforwards	$	25,359	$	22,586
Inventory		1,442		1,520
Accruals		760		401
Depreciation and amortization		88		60
Limitation on business interest		96		—
Stock-based compensation		1,416		1,228
Gross deferred tax assets		29,161		25,795
Valuation allowance		(29,073)		(25,721)
Deferred tax assets		88		74
Deferred tax liabilities:
Prepaid expenses		(88)		(74)
Deferred tax liabilities		(88)		(74)
Net deferred tax assets	$	—	$	—

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of December 31, 2018 and 2017. In 2018, there was no utilization of the valuation allowance and the net valuation allowance increased by $3.4 million. In 2017, the valuation allowance decreased by $7.1 million, from the December 31, 2016 balance of $32.8 million, due to the Tax Cuts and Jobs Act, which was enacted in December 2017 and reduced the corporate tax rate from 34% to 21%. The rate reduction took effect on January 1, 2018. The carrying value of the Company’s deferred tax assets is also determined by the enacted US corporate income tax rate.

As of December 31, 2018, the Company had federal net operating loss carryforwards of approximately $112.3 million, of which $99.7 million will begin to expire in the year of 2028 if not utilized, and $12.6 million will carryover indefinitely. In addition, the Company had state net operating loss carryforwards of approximately $44.3 million, of which $43.5 million will begin to expire in 2023 if not utilized, and $0.8 million will carryover indefinitely.

The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s ability to utilize these carryforwards.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years beginning in 2008, due to the accumulated net operating losses that are being carried forward for tax purposes.

The Company has not identified any unrecognized tax benefits as of December 31, 2018 and 2017. As the Company has a full valuation allowance on its deferred tax assets, any unrecognized tax benefits would reduce the deferred tax assets and the valuation allowance in the same amount. The Company does not expect the amount of unrecognized tax benefits to materially change in the next twelve months.