12. Income Taxes

During the years ended December 31, 2019 and 2018, the Company recorded no income tax benefits for the net operating losses incurred due to its uncertainty of realizing a benefit from those items. The Company’s losses before income taxes were generated in the United States and the United Kingdom.

Net loss before the provision for income taxes for the years ended December 31, 2019 and 2018, consisted of the following (in thousands):


	Year Ended
	December 31,
	2019		2018
United Kingdom	$	32,725	$	28,123
United States		10,448		4,357
	$	43,173	$	32,480

The provision for income taxes for the years ended December 31, 2019 and 2018 consisted of the following (in thousands):


	Year Ended
	December 31,
	2019		2018
Current
Federal	$	—	$	—
State		17		—
Foreign		660		472
Total current		677		472
Deferred
Federal		—		—
State		—		—
Foreign		—		—
Total deferred		—		—
Total income taxes	$	677	$	472

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


	Year Ended
	December 31,
	2019		2018
Income tax benefit computed at UK statutory tax rate	21.0	%	21.0	%
State taxes, net of federal benefit	6.9		4.6
Foreign rate differential	(3.0)		(3.4)
Disregarded entity	15.9		12.0
Research and development tax credits	1.4		1.4
Permanent difference	0.1		(0.5)
Valuation allowances	(42.4)		(35.1)
Foreign withholding tax	(1.5)		(1.4)
Effective income tax rate	(1.6)	%	(1.4)	%

Net deferred tax assets consisted of the following (in thousands):


	As of December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	36,151	$	20,051
Tax credit carryforwards		3,507		2,321
Accrued expenses and other		2,037		1,097
Total deferred tax assets		41,695		23,469
Deferred tax liabilities:
ASC 842 right-of-use asset		(442)		—
Depreciation and amortization		—		(10)
Total deferred tax liabilities		(442)		(10)
Valuation allowance		(41,253)		(23,459)
Net deferred tax assets	$	—	$	—

Net operating losses generated in years ending after December 31, 2018 will be carried forward indefinitely and can no longer be carried back, and net operating losses generated in years beginning after December 31, 2017, can only reduce taxable income by 80% when utilized in a future period. As of December 31, 2019, the Company had federal and state net operating loss carryforwards (“NOLs”) of $74.9 million and $76.4 million which begin to expire in 2035. Included in the $74.9 million of federal net operating losses are losses of $62.2 million that will carry forward indefinitely as a result of the Tax Cuts and Jobs Act. As of December 31, 2019, the Company had federal and state research and development tax credits carryforwards of $2.7 million and $1.0 million, which begin to expire in 2035 and 2026, respectively.

Utilization of the NOLs and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the NOLs or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.

As of December 31, 2019, the Company had NOLs in the United Kingdom of $91.8 million to offset future taxable income. The NOLs in the United Kingdom can be carried forward indefinitely.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the federal, state and foreign deferred tax assets. Accordingly, a full valuation allowance of $41.3 million has been established against the deferred tax assets as of December 31, 2019. Management reevaluates the positive and negative evidence at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2019 and 2018 related primarily to the increases in NOLs and research and development tax credit carryforwards and were as follows (in thousands):


		Year Ended
		December 31,
	2019		2018
Valuation allowance at beginning of year	$	(23,459)	$	(11,724)
Increases recorded to income tax provision		(17,794)		(11,735)
Valuation allowance at end of year	$	(41,253)	$	(23,459)

The Company has not recorded an amount for unrecognized tax benefits or related interest and penalties accrued as of December 31, 2019. The Company files income tax returns in the United States, Massachusetts and the United Kingdom. The federal and state returns are generally subject to tax examinations for the tax years ended December 31, 2015 to the present. The statute of limitations for assessment by the United Kingdom is open for the tax years since 2015. There are currently no pending tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future or prior period. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.