Income Taxes

12 Months Ended

Dec. 31, 2019

Income taxes

Income taxes are based on the following book income (loss) before income tax expense:


	Year Ended December 31,
	2019		2018
Domestic operations	$	(103,109)	$	(146,247)
Foreign operations	(6,944)		39,589
Loss before provision for income taxes	$	(110,053)	$	(106,658)

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,
	2019		2018
Income tax expense at statutory rate	21.0	%	21.0	%
Permanent items	(0.8)		0.5
Foreign rate differential	—		(0.8)
Impact of foreign operations	—		(7.2)
State taxes, net of federal benefit	3.0		3.9
Tax rate changes	—		(0.6)
Foreign exchange and other	0.7		(0.6)
Change in valuation allowance	(23.9)		(16.2)
Effective income tax rate	0.0	%	0.0	%

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


	Year Ended December 31,
	2019		2018
Deferred tax assets:
Accrued expenses and other	$	4,349	$	1,674
Prepaid licensing arrangement	11,154		11,562
Interest expense	4,469		1,267
Stock compensation	5,468		3,493
Research and development credits	2,485		2,485
Net operating losses	51,644		32,548
Total deferred tax assets	79,569		53,029
Deferred tax liabilities:
Fixed assets, including leases	(630)		(409)
Total deferred tax liabilities:	(630)		(409)
Less: Valuation allowance	(78,939)		(52,620)
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.

As of December 31, 2019, the Company had foreign net operating loss (NOL) carry forwards of $52,806 primarily from its operations in Norway. As of December 31, 2019, the Company had federal and state NOLs of $164,937 and $90,594, 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 NOLs generated after 2017 have 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, 2019 and 2018, 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 $26,319 during the year ended December 31, 2019.

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, 2019, 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.