Income taxes

The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017 with most changes effective January 1, 2018. Among other changes, the TCJA significantly lowered the US corporate income tax rate from 35% to 21% as of 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 US corporate income tax rate, the Company revalued its net deferred tax assets at December 31, 2017. Due to the full valuation allowance on the Company's deferred tax assets, no tax expense or benefit associated with the re-measurement was recognized in the Company's consolidated statement of operations for the year ended December 31, 2017. The change in the US corporate tax rate is also included in the Company’s deferred tax table.

The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (E&P). As the Company's foreign subsidiaries did not have accumulated E&P, the Company did not record any income tax expense related to the transition tax.

Due to the timing of and the substantial changes made by the TCJA, the Staff of the Securities and Exchange Commission (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. Accordingly, the Company recorded a preliminary estimate of the impact of the TCJA and the re-measurement of its deferred tax assets and liabilities in 2017. The Company finalized its analysis of the impact of the TCJA and recorded the adjustment, which was not material, in 2018.

Income taxes have been recorded on the following book income (loss) before income tax expense:



	Year Ended December 31,
	2018			2017
Domestic operations	$	(146,247	)	$	(30,463	)
Foreign operations	39,589			(18,439		)
Loss before provision for income taxes	$	(106,658	)	$	(48,902	)

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



	Year Ended December 31,
	2018		2017
Income tax expense at statutory rate	21.0	%	35.0	%
Permanent items	0.5		0.5
Foreign rate differential	(0.8	)	(4.2	)
Impact of foreign operations	(7.2	)	—
State taxes, net of federal benefit	3.9		0.8
Tax rate changes	(0.6	)	(15.4	)
Foreign exchange and other	(0.6	)	—
Change in valuation allowance	(16.2	)	(16.7	)
Effective income tax rate	0.0	%	0.0	%

Tax rate changes includes the impact of the reduction in the US tax rate in 2017 under the TCJA and a reduction in the Norway tax rate in both 2017 and 2018.

The principal components of the Company’s deferred tax assets and liabilities are as follows:



	Year Ended December 31,
	2018			2017
Deferred tax assets:
Accrued expenses and other	$	1,674		$	972
Prepaid licensing arrangement	11,562			—
Property and equipment	—			55
Interest expense	1,267			783
Stock compensation	3,493			1,701
Research and development credits	2,485			2,485
Net operating losses	32,548			29,636
Total deferred tax assets	53,029			35,632
Deferred tax liabilities:
Fixed assets	(409		)	—
Total deferred tax liabilities:	(409		)	—
Less: Valuation allowance	(52,620		)	(35,632		)
Total net deferred tax assets (liabilities)	$	—		$	—

During 2018, our wholly-owned subsidiary in Norway licensed certain intellectual property rights related to XHANCE to our US subsidiary. While this transaction did not result in any gain or loss in the condensed consolidated statements of operations, the transaction generated taxable income in both Norway and the US. Norway tax loss carryforwards were utilized to offset the taxable income in Norway and the income reduced the current year US taxable loss. There were no cash taxes associated with the transaction.

The TCJA, in addition to the changes indicated above, contained other provisions that may have a future impact on the Company. The provisions include limitations on the deductibility of interest based on the amount of adjusted taxable income, the deferral of research and development deductions, the acceleration of deductions related to fixed asset additions, changes to the utilization of net operating loss carry forwards and changes in the carry forward period, and global intangible low-taxed income provisions that subject foreign subsidiary income that exceeds an allowable return to current US taxation.

As of December 31, 2018, the Company had foreign net operating loss (NOL) carry forwards of $50,513 primarily from its operations in Norway. As of December 31, 2018, the Company had federal and state NOLs of $86,574 and $57,017, respectively. These domestic NOL carry forwards may be subject to an annual limitation in the event of cumulative changes in the ownership interests of significant stockholders over a three‑year period in excess of 50%. This could limit the amount of NOLs that the Company can utilize annually to offset future domestic taxable income, if any. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The federal NOL generated in 2018 has an indefinite carry forward period. The federal NOLs generated prior to 2018 will expire from 2030 through 2037. Some state NOLs will not expire while other state NOLs expire over various periods depending on the rules of the jurisdiction in which they were generated. The earliest state NOL expiration is in 2028.

ASC 740 requires the establishment of a valuation allowance to reduce deferred tax assets if, based on the weight of the available positive and negative evidence it is more likely than not that all or a portion of the deferred tax assets will not be realized. There is insufficient positive evidence to overcome the negative evidence attributable to the Company’s cumulative operating losses. Consequently, the Company established a full valuation allowance against its net deferred tax assets at December 31, 2018 and 2017, respectively, because the Company’s management was unable to conclude that it is more likely than not that these assets will be fully realized. The Company had a net increase in its valuation allowance of $16,988 during the year ended December 31, 2018.

The Company files income tax returns in Norway, the UK, the US, and various states. The Company is subject to examination by federal, state and foreign jurisdictions. The Company’s tax years in the US are open under statute from inception to present. All open years may be examined to the extent that tax credits or net operating loss carryforwards are used in future periods.

The Company’s policy is to record interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.