10. Income Taxes

On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Tax Act”), was signed into law. Among other items, the Tax Act reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company revalued its net deferred tax asset at the new lower tax rate as of December 31, 2017 which reduced the value of the deferred tax asset before valuation allowance by $2,572,000.

The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which allows the Company to record provisional amounts during a measurement period. At December 31, 2017 provisional amounts were recorded related to the deferred rate change. At December 31, 2018 the measurement period has ended and the Company's accounting related to the 2017 Tax Cuts and Jobs Act is complete. The Company did not make any measurement-period adjustments related to the provisional item recorded as of December 31, 2017.

The Company has accumulated net losses since inception and has not recorded an income tax provision or benefit during the years ended December 31, 2018 and December 31, 2017.

The following summarizes the difference (in thousands) between the income tax expense and the amount computed by applying the statutory federal income tax rate of 21% for 2018 and 34% for 2017 to income before income tax:


	December 31,
	2018		2017
Federal income tax at statutory rate	$	(4,642)	$	(8,383)
State income tax, net of federal benefit		(1,300)		(1,096)
Effect of reduced corporate tax rates		—		2,644
Foreign tax differential		733		1,993
Permanent differences		178		2,549
Tax credits generated in current year		(783)		(362)
Other		1		269
Valuation allowance change		5,813		2,386
	$	—	$	—

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 (in thousands) are as follows:


	December 31,
	2018		2017
Net operating loss carryforwards	$	10,228	$	5,530
Accruals and reserves		1,053		707
Research and development credits		1,368		640
Deferred Revenue		6		—
Depreciation and amortization		(23)		(4)
Total		12,632		6,873
Valuation allowance		(12,632)		(6,873)
Net deferred tax assets (liabilities)	$	—	$	—

The Tax Legislation subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognized deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred. The Company does not have a GILTI inclusion in 2018; therefore, no GILTI tax has been recorded for the year ended December 31, 2018.

Based on the available objective evidence, management believes it is more-likely-than-not that the deferred tax assets were not fully realizable as of December 31, 2018 and 2017. Accordingly, the Company has established a full valuation allowance against its deferred tax assets. The net change in the valuation allowance for the year ended December 31, 2018 and 2017 was $5,813,000 and $2,386,000, respectively.

At December 31, 2018, the Company had federal net operating loss carryforwards of approximately $19,555,000 that begin to expire in 2035. The Company has federal net operating losses of $16,450,000 that arose after the 2017 tax year and will carryforward indefinitely, the utilization of which is limited to 80% of taxable income in any given year. The net operating Company has net operating losses carryforwards of $38,186,000 that will begin to expire in 2035. At December 31, 2018, the Company has research credit carryforwards of $1,363,000 and $582,000 for federal and California state income tax purposes, respectively. The federal credits begin to expire in 2035 and the state credits can be carried forward indefinitely.

Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. The Company has not completed an analysis to determine whether any such limitations have been triggered as of December 31, 2018. The Company has no income tax affect due to the recognition of a full valuation allowance on the expected tax benefits of future loss carry forwards based on uncertainty surrounding realization of such assets. Any annual limitation may result in the expiration of net operating losses and credits before utilization. The Company may continue to experience ownership changes in the future as a result of the Company’s IPO, future expected equity financings and subsequent shifts in its stock ownership, some of which may be outside of its control.

The Company is subject to taxation in the United States, California, the Netherlands and China. The Company remains subject to possible examination by tax authorities in these jurisdictions for tax years dating back to 2014. The Company does not have any pending tax examinations. Following the Company’s adoption of ASC 740-10 regarding accounting for uncertainty in income taxes, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with the guidance. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of that review, the Company concluded there were no uncertain tax positions and no cumulative effect on retained earnings at the time of adoption.

At December 31, 2018, the Company did not have any uncertain tax positions. The Company will recognize 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. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.