10.

Income Taxes

For the years ended December 31, 2015, 2014 and 2013, the Company has not recorded a provision for federal or state income taxes as it has had cumulative net operating losses since inception. The Company's losses before income taxes consist solely of domestic losses.

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

	Year Ended December 31,
	2015			2014			2013
Income tax benefit using U.S. federal statutory rate	$	(7,315	)	$	(1,136	)	$	(2,690	)
Permanent differences		260			124			299
Orphan Drug credit permanent addback		1,310			674			-
State income taxes, net of federal benefit		(808	)		(303	)		(389	)
Tax credits		(4,219	)		(2,176	)		(7,164	)
Expired net operating losses and tax credits		-			312			2,566
Change in valuation allowance		9,782			4,394			7,286
Mark-to-market derivative liability		-			(1,779	)		-
Other		990			(110	)		92
	$	-		$	-		$	-

The

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

	Year Ended December 31,
	2015			2014			2013
Net operating loss carryforwards	$	34,488		$	29,217		$	26,304
Federal and state tax credits		16,404			12,126			9,941
Deferred revenue		-			-			1,147
Accrued expenses		27			478			332
Patents		443			531			612
Stock-based compensation		596			92
Other		276			8			300
		52,234			42,452			38,636
Valuation allowance		(52,234	)		(42,452	)		(38,636	)
Net deferred tax asset	$	-		$	-		$	-

In November 2015, the FASB issued ASU No. 2015-17,

Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

(“ASU 2015-17”), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU 2015-17 may be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company has elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2015. As a result, the Company has presented all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet as of December 31, 2015, but have not reclassified current deferred tax assets and liabilities on the consolidated balance sheet as of December 31, 2014. There was no impact on the Company’s results of operations as a result of the adoption of ASU 2015-17.

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, 2015, 2014 and 2013.

The valuation allowance increased approximately $9.8 million during the year ended December 31, 2015, due primarily to the addition of Orphan Drug tax credits and the generation of net operating losses. The valuation allowance increased approximately $3.8 million during the year ended December 31, 2014, due primarily to the addition of Orphan Drug Tax credits and the generation of net operating losses. The valuation allowance increased approximately $7.3 million during the year ended December 31, 2013, due primarily to the addition of Orphan Drug Tax credits for 2009 through 2012 as well as the generation of net operating losses during the year ended December 31, 2013, both of which have a full valuation allowance.

Subject to the limitations described below, as of December 31, 2015, 2014 and 2013, the Company has net operating loss carryforwards of approximately $94.4 million, $78.1 million and $69.9 million, respectively, to offset future federal taxable income, which will expire at various times between 2026 and 2035. The Company has an additional $0.4 million of net operating losses in 2015 that are attributable to excess stock option deductions which would be recorded as an increase in additional paid-in capital upon reducing cash taxes paid. As of December 31, 2015, 2014 and 2013, the Company has state net operating loss carryforwards of approximately $46.4 million, $55.1 million and $45.4 million, respectively, to offset future state taxable income, which will expire at various times between 2026 and 2035. As of December 31, 2015, 2014 and 2013, the Company has tax credit carryforwards of approximately $16.9 million, $12.5 million and $10.3 million, respectively, to offset future federal and state income taxes, which will expire at various times between 2023 and 2035.

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. The Company is in the process of completing an analysis to determine if there were changes in ownership for tax years through 2015, as defined by Section 382. To the extent that the Company undergoes a change in ownership, this could substantially limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. If this were to occur, this could result in increased U.S. federal income tax liability for the Company if it generates taxable income in a future period. Limitations on the use of NOLs and other tax attributes could also increase the state tax liability. The use of tax attributes will also be limited to the extent that the Company does not generate positive taxable income in future tax periods. The amount of the annual limitation is determined based on the Company's value immediately prior to any ownership change.

The Company had no unrecognized tax benefits or related interest and penalties accrued during the years ended December 31, 2015, 2014 and 2013. 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, 2012 through 2015, although carryforward attributes that were generated prior to tax year 2012 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, no federal or state income tax returns are under examination by the respective taxing authorities.