10. Income Taxes 

 

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. Significant components of our deferred tax assets are as follows:

 

 

 

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.  Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

 

The valuation allowance increased by $15.9 million and $15.9 million and decreased by $2.4 million for the years ended December 31, 2013, 2014 and 2015, respectively.

 

At December 31, 2015, we had net operating loss carryforwards available to offset any future taxable income that we may generate for federal income tax purposes of $178.1 million, which expire in the years 2019 through 2035, California net operating loss carryforwards of $116.2 million, which expire in the years 2016 through 2035, and net operating loss carryforwards from other states of $27.9 million, which expire in the years 2023 through 2035. Our federal and state net operating loss carryforwards as of December 31, 2015 include amounts resulting from exercises and sales of stock option awards to employees and non-employees.  When we realize the tax benefit associated with these stock option exercises as a reduction to taxable income in our returns, we will account for the tax benefit as a credit to stockholders’ equity rather than as a reduction of our income tax provision in our financial statements. Based upon our stock option exercise history, we believe such amounts are not a material component of our total net operating loss carryforwards as of December 31, 2015.

 

At December 31, 2015, we also had federal and California research and development tax credits of $17.4 million and $2.8 million, respectively. The federal research credits will expire in the years 2019 through 2035 and the California research credits have no expiration date. Our deferred tax assets have been offset by a full valuation allowance as the realization of such assets is uncertain. 

 

Utilization of our net operating losses and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions.  Such limitations could result in the expiration of the net operating losses and tax credit carryforwards before utilization.

 

The following table presents a reconciliation from the statutory federal income tax rate to the effective rate.

 

 

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other pertinent information.

 

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

 

 

As of December 31, 2015, the Company's total amount of unrecognized tax benefit was approximately $4.3 million. There would be no impact to the effective tax rate if these tax benefits were recognized while the Company maintains a full valuation allowance. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

 

While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the recorded position. Accordingly, the Company’s provisions on federal and state tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved.

 

All tax years from inception remain open to examination by the Internal Revenue Service, the California Franchise Tax Board and other state taxing authorities until such time as the net operating losses and research credits are either fully utilized or expire.