6. Income Taxes

The following table presents the components of income (loss) before income taxes (in thousands):


	Year Ended December 31,
	2018		2017		2016
United States	$	(31,436)	$	(27,019)	$	(23,173)
Foreign		(75)		—		—
	$	(31,511)	$	(27,019)	$	(23,173)

The following table summarizes the provision for (benefit from) income taxes (in thousands):


	Year Ended December 31,
	2018		2017		2016
Current:
United States
Federal	$	—	$	—	$	—
State		18		—		—
Foreign		—		—		—
Total current income tax provision		18		—		—
Deferred
United States
Federal		2		—		—
State		5		—		—
Foreign		—		—		—
Total deferred income tax provision (benefit)		7		—		—
Total income tax provision (benefit)	$	25	$	—	$	—

During the years ended December 31, 2018 and 2017, the Company recorded an income tax provision of $25 and $0 thousand, respectively. During the years ended December 31, 2018, 2017 and 2016, the Company recorded no income tax benefits for any net losses incurred and the tax credits generated in each year, due to its uncertainty of realizing a benefit from those items.

A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:


	Year Ended December 31,
	2018		2017
Federal statutory income tax rate	21.0	%	34.0	%
State taxes, net of federal tax benefit	6.0	%	4.8	%
Stock compensation	1.1	%	0.0	%
Permanent items	(1.2)	%	(1.6)	%
Tax Credits	2.7	%	2.6	%
Foreign differential	0.0	%	0.0	%
U.S. Tax Reform	0.0	%	(53.2)	%
Other, net	0.2	%	(1.1)	%
Valuation Allowance	(29.9)	%	14.5	%
Effective income tax rate	(0.1)	%	0.0	%

The significant reconciling items between the reported amounts of income tax expense for the year to the amount of income tax expense that would result from applying the U.S. statutory tax rate to pre-tax income include state taxes, non-deductible expenses, stock based compensation tax benefits, tax credits, and the valuation allowance maintained against certain of the Company’s deferred tax assets.

During 2018, the Company acquired Aushon Biosystems. The Company analyzed the transaction from an income tax perspective and adjusted the deferred tax assets and liabilities related to the Aushon Biosystems acquisition. Of the total goodwill recorded, approximately $0.4 million is amortizable related to historical tax basis that Aushon had related to a prior acquisition.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law, making significant changes to the Internal Revenue Code. Changes included, but were not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative deferred foreign earnings as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued, which directed taxpayers to consider the impact of the Act as “provisional” when a registrant did not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. During the fourth quarter of 2018 the Company completed its accounting for the tax effects of the Act and recorded no adjustments in its consolidated financial statements.

A valuation allowance is provided when it is more likely than not that all or a portion of the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company maintains a valuation allowance against its net U.S. and foreign deferred tax assets as a result of the negative evidence associated with its history of operating losses.

Deferred tax assets and liabilities reflect the net tax effects of net operating loss carryovers and temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):


	December 31,
	2018		2017
Deferred tax assets:
Net operating loss carryforwards	$	35,623	$	27,952
Research and development credits		4,678		3,637
Deferred revenue		1,614		1,795
Depreciation		86		629
Amortization		792		—
Stock compensation		541		185
Other deferred tax assets		1,378		614
Total deferred tax assets		44,712		34,812
Valuation allowance		(44,033)		(34,552)
Subtotal		679		260
Section 481(a) Adjustment - Accrued Bonus		(59)		(118)
Amortization		(610)		—
Goodwill		(17)
Stock-based compensation		—		(142)
Net deferred tax assets (liability)	$	(7)	$	—

As of December 31, 2018, the Company had federal and state net operating loss carryforwards of $136.8 million and $108.8 million, respectively. $0.9 million of the federal net operating loss carryforwards relates to the acquisition of Aushon Biosystems and these losses have been reduced to reflect the limitations on these losses as a result of Section 382 of the Internal Revenue Code. These carryforwards begin to expire in 2026 and 2019, respectively. As of December 31, 2018, the Company had federal and state credit carryforwards of $3.8 million and $1.2 million, respectively. These carryforwards begin to expire in 2026 and 2019, respectively. As of December 31, 2018, the Company had foreign net operating loss carryforwards of $75 thousand. Of this amount, carryforwards of $75 thousand expire in 2027.

The Company recognizes a deferred tax asset for the future benefit of tax loss carryforwards, tax credit carryforwards, and other deductible temporary differences to the extent that it is more likely than not that these assets will be realized. In evaluating the Company’s ability to recover these deferred tax assets, the Company considers all available positive and negative evidence, including its past operating results, taxable income in carryback years, the projected reversal of existing deferred tax liabilities, the availability of tax planning strategies and its forecast of future taxable income. Based on the significant negative evidence, including the three-year cumulative loss position, the Company concluded that its net U.S. deferred tax assets as well as the deferred tax assets in certain foreign subsidiaries were not more likely than not realizable and maintained a full valuation allowance against these deferred tax assets at December 31, 2018.

The valuation allowance increased by $9.4 million during the year ended December 31, 2018, primarily as a result of the U.S. operating losses incurred, the research and development tax credit carryforwards generated during the year and acquisition of Aushon Biosystems, Incorporated.

The valuation allowance decreased by $3.9 million during the year ended December 31, 2017. The decrease in valuation allowance was primarily the result of the impact of the U.S. corporate tax rate reduction enacted during 2017, which resulted in the Company remeasuring its deferred tax assets and liabilities at the lower 21% U.S. federal corporate tax rate and a corresponding reduction in the valuation allowance. This reduction was partially offset by the valuation allowance established in 2017 related to U.S. and foreign operating losses incurred and tax credits generated during the year.

Under Sections 382 and 383 of the U.S. Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an ownership change generally occurs if there is a cumulative change in its ownership by 5% stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under U.S. state tax laws. The Company may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in its share capital, some of which may be outside of the control of the Company. As a result, if the Company earns net taxable income, its ability to use its pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to significant limitations.

In the ordinary course of business, there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions for which it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements.

The Company accounted for uncertain tax positions using a more likely than not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on an annual basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. For the years ended December 31, 2018, 2017 and 2016, there were no accrued interest or penalties in the consolidated statements of operations and comprehensive loss. The Company does not anticipate any significant changes in the next twelve months associated with its liability for unrecognized tax benefits.

The Company is subject to taxation in the United States as well as the Netherlands and China. At December 31, 2018, the Company is generally no longer subject to examination by taxing authorities in the United States for years prior to 2015. However, net operating loss carryforwards and credits in the United States may be subject to adjustments by taxing authorities in future years in which they are utilized. The Company’s foreign subsidiaries remain open to examination by taxing authorities from 2018 onward.

The Company’s foreign subsidiary has incurred losses since inception, and the Company had immaterial undistributed earnings as of December 31, 2018.