(

)

Income Taxes

The Company

’s provision for income taxes for the years ended

December 31, 2017,

2016

and

2015

was

for all years.

The provision for income taxes differs from the amount which would result by applying the federal statutory income tax rate to pre-tax loss for the years ended

December 31,

2017,

2016

and

2015.

The reconciliation of the provision computed at the federal statutory rate to the Company’s provision for income taxes was as follows (in thousands):

	Years ended December 31 ,
	201 7			201 6			201 5
Tax at federal statutory rat e	$	(4,185	)	$	(3,505	)	$	(2,277	)
State, net of federal benefi t		(1,238	)		(315	)		(335	)
Research and development credi t		(135	)		(89	)		(51	)
Stock-based compensatio n		344			136			89
Nondeductible interes t		—			590			471
Warrant and derivative revaluatio n		—			328			(589	)
Change in Federal tax rat e		8,172			—			—
Othe r		7			94			5
Change in valuation allowanc e		(2,965	)		2,761			2,687
Total provision for income taxe s	$	—		$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss

and tax credit carryforwards, net of any adjustment for unrecognized tax benefits. The components of the net deferred income tax assets as of

December 31, 2017

and

2016

were as follows (in thousands):

	December 31 ,
	201 7			201 6
Accrued compensatio n	$	110		$	154
Inventory adjustment s		449			708
Depreciation and amortization - noncurren t		146			252
Share-based compensatio n		558			273
Net operating loss and tax credit carryforwards - noncurren t		17,368			20,196
Othe r		34			47
Gross deferred tax asse t		18,665			21,630
Valuation allowanc e		(18,665	)		(21,630	)
Net deferred tax asse t	$	—		$	—

The Company has approximately

$57.6

million and

$47.7

million of federal and state net operating loss carryforwards, respectively, as of

December 31, 2017.

For tax reporting purposes, operating loss carryforwards are available to offset future taxable income; such carryforwards expire in varying amounts beginning in

2022

and

2028

for federal and state purposes, respectively. Under current federal and California law, the amounts of and benefits from net operating losses carried forward

may

be impaired or limited in certain circumstances. Events which

may

cause limitations in the amount of net operating losses that the company

may

utilize in any

one

year include, but are

not

limited to, a cumulative ownership change of more than

50%

over a

three

-year period.

Generally, utilization of the net operating loss carryforwards and credits

may

be subject to a substantial annual limitation due to the ownership change limitations provided by section

382,

which discusses limitations on NOL carryforwards and certain built-in losses following ownership changes, and section

383,

which discusses, special limitations on certain excess credits, etc., of the Internal Revenue Code (IRC) of

1986,

as amended and similar state provisions. Accordingly, our ability to utilize net operating losses carryforwards

may

be limited, potentially significantly, as the result of such an “ownership change”.

The Company has

not

yet performed a comprehensive study to determine if it has undergone any ownership changes. If the Company is able to potentially utilize its net operating loss carryforwards, it will perform a comprehensive section

382

study to determine what, if any, limitation on its ability to utilize its NOLs exists.

December 31,

201

the Company has federal and state research and development credits of approximately

$1.6

million and

$1.3

million available to offset future federal and state income taxes, respectively. The federal tax credit carryforward expires beginning in

2028.

The state credit carryforward has

expiration.

The Company does

not

believe that these assets are realizable on a more-likely than

not

basis; therefore, the net deferred tax assets have been fully offset by a valuation allowance. The Company did

not

have a deferred tax liability as of

December 31, 2017

and

2016.

The net decrease in the total valuation allowance for the year ended

December 31, 2017

was

$3.0

million primarily due to the decreased Federal Tax Rate applied to deferred tax assets, with an offsetting increase from net operating losses generated. The net increase in the total valuation allowance for the year ended

December 31, 2016

was

$2.8

million, primarily from the net operating losses generated.

liability related to uncertain tax positions is reported in the consolidated financial statements.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):

	December 31 ,
	201 7		201 6
Balance, beginning of yea r	$	608	$	531
Additions based on tax positions related to the current yea r		117		77
Additions (reductions) for tax positions related to prior year s		—		—
Balance, end of yea r	$	725	$	608

Recognition of approximately $

511,000

and

$398,000

of unrecognized tax benefits would impact the effective rate at

December 31, 2017

and

2016,

respectively, if recognized. Contributing to the increase in amount impacting the rate is the consideration of the federal tax rate change as a result of the Tax Act.

The Company is subject to U.S. federal, California, Colorado, Georgia, Michigan, and New Jersey income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company was incorporated in

2002

and is subject to U.S. federal, state and local tax examinations by tax authorities for all prior years.

US Tax Reform - Impact of the Tax Cuts and Jobs Act

December 22, 2017,

the Tax Cuts and Jobs Act (H.R.

) (the Tax Act) was signed into law. The Tax Act contains significant changes to corporate taxation, including; (i) the reduction of the corporate income tax rate from a maximum rate of

35%

21%,

(ii) the acceleration of expensing for certain business assets, (iii) the

one

-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense, (vi) expanded limitations on executive compensation, (vii) acceleration of tax revenue recognition, (viii) capitalization of research and development expenditures and (ix) creation of new minimum taxes such as the base erosion anti-abuse tax (BEAT) and Global Intangible Low Taxed Income (GILTI) tax.

The key impact of the Tax Act on our financial statement

s was the re-measurement of the deferred tax balances to the new corporate tax rate. While we have

not

yet completed our assessment of the effects of the Tax Act, we are able to determine a reasonable estimate for this impact. In accordance with Staff Accounting Bulletin

No.

118

(“SAB

118”

), we are providing additional disclosures related to this provisional amount.

In order to calculate the effects of the new corporate tax rate on our deferred tax balances, ASC

740

“Income Taxes” (ASC

740

) required the re-measurement of our deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances were expected to reverse in the future. The Act reduces the corporate tax rate to

percent, effective

January 1, 2018.

Consequently we have recorded a decrease related to DTAs of

$8.2

million with a corresponding net reduction to valuation allowance of

$8.2

million for the year ending

December 31, 2017.

The Company has

not

yet made a policy election with respect to its treatment of potential base erosion anti-abuse tax (BEAT) and Global Intangible Low Taxed Income (GILTI). Companies can either account for taxes on BEAT and GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the BEAT and GILTI inclusion upon reversal. The Company is still in the process of analyzing the provisions of the Act associated with BEAT and GILTI and the expected impact of BEAT and GILTI on the Company in the future.

The provisional amount related to the deferred tax balances are based on information available at this time and

may

change due to a variety of factors, including, among others, (i) anticipated guidance from the U.S. Department of Treasury about implementing the Tax Act, (

ii) any impact resulting from our

December 31, 2017

financial closing and reporting processes, and (iii) management’s further assessment of the Tax Act and related regulatory guidance. We are

not

complete in our assessment of the impact of the Tax Act on our business and consolidated financial statements. We will continue our assessment of the impact of the Tax Act on our business and consolidated financial statements throughout the

one

-year measurement period as provided by SAB

118.