10. Income Taxes

The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017 and became effective January 1, 2018. The TCJA had significant changes to U.S. tax law, lowering U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modified the taxation of other income and expense items.

The TCJA reduced the U.S. corporate income tax rate from 34% to 21%, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 34% to 21% under the TCJA, we revalued deferred tax assets, net as of December 31, 2017. The tax impact of revaluation of the deferred tax assets, net was $16.1 million which was wholly offset by a corresponding reduction in our valuation allowance of $16.1 million resulting in a no net impact to our income tax expense.

The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits. The Company did not have consolidated accumulated earnings and profits attributable to it foreign subsidiaries, accordingly, the Company did not record any income tax expense related to the transition tax.

Due to the timing of the new tax law and the substantial changes it brings, the Staff of the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides registrants a measurement period to report the impact of the new US tax law. During the measurement period, provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made. To the extent that all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up to one year following enactment of the TCJA. During 2018 we finalized our analysis of the impact of TCJA and have not recorded any adjustments to our provisional estimates.

Loss before income taxes is allocated as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
U.S. operations	$	7,855	$	8,347	$	28,643
Foreign operations		28,871		10,551		—
Loss before income taxes	$	36,726	$	18,898	$	28,643

As of December 31, 2018 and 2017, we had approximately $131.6 million and $128.1 million, respectively, of net operating loss (NOL) carry forwards available to offset future federal and state taxable income that will expire beginning in 2023. We also have federal research and development credit carryovers of approximately $5.7 million and state credit carryovers of which approximately $0.4 million expire beginning in 2019. In 2017, we received net proceeds of $0.4 million from the sale of state research and development credits, which was recorded as a credit to research and development expenses on our consolidated statement of operations.

The NOL carry forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three‑year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, as well as similar state tax provisions. This could limit the amount of NOLs that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. In addition, U.S. tax laws limit the time during which these carry forwards may be applied against future taxes, therefore, we may not be able to take full advantage of these carry forwards for federal income tax purposes. We have not evaluated the ownership history of our company to determine if there were any ownership changes as defined under Section 382(g) of the Code and the effects any ownership change may have had.

The components of the net deferred tax asset are as follows (in thousands):


	December 31,
	2018		2017
Gross deferred tax assets:
Net operating loss carryforwards	$	36,383	$	35,559
Accrued expenses		52		52
Contributions		3		4
Deferred expenses		—		35
Stock‑based compensation		1,640		1,459
Research and development and other credits		6,545		5,536
Total gross deferred tax assets	$	44,623	$	42,645
Gross deferred tax liabilities:
Depreciation		(18)		(17)
Total gross deferred tax liabilities		(18)		(17)
Net deferred tax assets		44,605		42,628
Less: valuation allowance		(44,605)		(42,628)
Net deferred tax assets after valuation allowance	$	—	$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2018 and 2017. The valuation allowance increased by $2.0 million and decreased by $12.9 million during the years ended December 31, 2018 and 2017, respectively. The increase in 2018 was due primarily to our increase in net operating loss carryovers. The decrease in 2017 was due primarily to the TCJA which reduces the federal corporate income tax rate in the United States to 21% from 34%, effective January 1, 2018.

We did not have unrecognized tax benefits as of December 31, 2018 and 2017, and do not expect this to change significantly over the next twelve months. We recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. Accrued interest and penalties, where appropriate, are recorded in income tax expense. We did not have uncertain tax positions as of December 31, 2018 and 2017. As of December 31, 2018 and 2017, we have not accrued interest or penalties related to any uncertain tax positions.

A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:


	Year Ended December 31,
	2018		2017		2016
Federal income tax expense at statutory rate	21.0	%	34.0	%	34.0	%
Permanent items	(0.9)		(0.6)		(1.2)
State income tax, net of federal benefit	0.1		2.8		7.5
R&D tax credits	4.3		1.1		5.2
Change in federal statutory rate on deferreds	(1.1)		(85.6)		—
Foreign income tax effect	(16.5)		(19.0)		—
Other	(1.6)		(1.1)		1.6
Change in valuation allowance	(5.3)		68.4		(47.1)
Effective income tax rate	0.0	%	0.0	%	0.0	%

For all years through December 31, 2018, we generated research and development credits but have not conducted a study to document the qualified activities. This study may result in an adjustment to our research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position for these years. A full valuation allowance has been provided against our research and development credits and, if an adjustment is required, this adjustment to the deferred tax asset established for the research and development credit carryforwards would be offset by an adjustment to the valuation allowance.

We file income tax returns in the United States, the State of Connecticut, and the Commonwealth of Pennsylvania. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2015 through December 31, 2017. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.