10.

Income Taxes

The components of loss from operations before income taxes are as follows (in thousands):

	Year Ended December 31,
	2018			2017			2016
Domestic	$	(17,855	)	$	(24,803	)	$	(15,860	)
Foreign		(2,874	)		(5,161	)		(12,666	)
Total	$	(20,729	)	$	(29,964	)	$	(28,526	)

For the years ended

December 31, 2018,

2017,

2016,

the Company has

not

recorded a provision for federal or state income taxes as it has had net operating losses since inception.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations is as follows (in thousands):

	Year Ended December 31,
	2018			2017			2016
Income tax benefit computed at federal statutory tax rate	$	(4,348	)	$	(10,186	)	$	(9,696	)
Permanent differences		6			4			430
Stock compensation - permanent items		325			689			-
R&D credit - permanent items		-			1,751			1,437
State income taxes, net of federal benefit		(958	)		(853	)		(498	)
Tax credits		(1,466	)		(5,495	)		(4,846	)
Change in valuation allowance		5,409			(54,319	)		8,804
Foreign rate differential		602			1,752			4,304
Rate change		-			2,202			-
382 limitation		-			64,975			-
Other		430			(520	)		65
Total	$	-		$	-		$	-

The significant components of the Company's deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2018			2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	6,742		$	2,651		$	37,237
Federal and state tax credits		3,122			2,244			21,223
Accrued expenses		411			399			544
Patents		132			191			360
Stock-based compensation		1,782			1,262			1,353
Other		169			202			321
Total deferred tax assets		12,358			6,949			61,038
Valuation allowance		(12,358	)		(6,949	)		(61,038	)
Net deferred assets	$	-		$	-		$	-

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company's history of operating losses, management of the Company has concluded that it is more likely than

not

that the benefit of its deferred tax assets will

not

be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of

December 31, 2018,

2017,

and

2016.

December 22, 2017,

the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss “NOL” carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of

34%

21%.

As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a decrease in net deferred tax asset of

$2.2

million and a corresponding reduction in the valuation allowance against these assets. There is

impact to income tax expense. The other provisions of the Tax Cuts and Jobs Act did

not

have a material impact on the

2017

2018

consolidated financial statements.

The Company’s preliminary estimate of the TCJA and the remeasurement of its deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA

may

require further adjustments and changes in our estimates. The Company completed the analysis of the

2017

Tax Act during the

fourth

quarter of

2018

and had

material changes to the original analysis.

Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (the "IRS") and

may

become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a

three

-year period in excess of

50%

as defined under Sections

382

and

383

in the Internal Revenue Code. This could substantially limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company's value immediately prior to the ownership change. Subsequent ownership changes

may

further affect the limitation in future years. On

August 2, 2017,

the Company completed a financing transaction for

$22.0

million. As a result of this transaction, the company performed a study to review the application of IRC

§382

and

§383

to the Company. It was determined there was an ownership change as of the date of this financing and the Company’s NOLs generated prior to

August 2, 2017

would be fully limited. Therefore, the NOLs and credits generated prior to

August 2, 2017

have been written down to zero. This represents a decrease in Federal NOLs of approximately

$107.3

million (

$34.1

million tax effected) and a decrease in federal credits of

$23.8

million. State NOLs and credits were also fully limited as a result of this ownership change. The state NOLs were reduced by approximately

$5.0

million and credits were reduced by

$2.1

million.

As a result of current year activity, the valuation allowance increased by approximately

$5.4

million during the year ended

December 31, 2018.

This was due primarily to the addition of Orphan Drug Tax credits and the generation of net operating losses. In the year ended

December 31, 2017,

the valuation allowance had an increase of approximately

$13.1

million. However, this increase was offset by a reduction of

$65.0

million due to the aforementioned

§382

limitation and a reduction of

$2.2

million due to the change in tax rate. Therefore, there was an overall decrease to the valuation allowance

$54.1

million. The valuation allowance increased by approximately

$8.8

million during the year ended

December 31, 2016,

due primarily to the addition of Orphan Drug Tax credits and the generation of net operating losses.

Subject to the limitations described below, as of

December 31, 2018,

2017,

and

2016,

the Company has net operating loss carryforwards of approximately

$25.7

million,

$10.6

million, and

$0.0

million, respectively, to offset future federal taxable income. The pre-

2018

federal net operating loss carryforwards expire at various dates through

2037.

Federal net operating loss carryforwards generated in

2018

and forward will have an unlimited carryforward period as part of the Tax Cuts and Jobs Act. The indefinite lived net operating loss carryforwards as of

December 31, 2018

are approximately

$14.7

million. As of

December 31, 2018,

2017,

and

2016,

the Company has state net operating loss carryforwards of approximately

$21.5

million,

$6.8

million, and

$0.0

million, respectively, to offset future state taxable income, which will expire at various times between

2037

and

2038.

As of

December 31, 2018,

2017

and

2016,

the Company has tax credit carryforwards of approximately

$3.1

million,

$2.3

million and

$0.0

million, respectively, to offset future federal and state income taxes, which will expire at various times between

2037

and

2038.

The Company had

unrecognized tax benefits or related interest and penalties accrued during the years ended

December 31, 2018,

2017,

and

2016.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense.

The Company is subject to U.S. federal income tax and primarily Massachusetts state income tax. The statute of limitations for assessment by the IRS and state tax authorities is open for tax years ending

December 31, 2015

through

2018,

although carryforward attributes that were generated prior to tax year

2015

may

still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. Currently,

federal or state income tax returns are under examination by the respective taxing authorities.