10.

Income Taxes

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

	Years ended December 31,
	2016			2015			2014
Domestic	$	(15,860	)	$	(21,377	)	$	(3,342	)
Foreign		(12,666	)		-			-
Loss before income taxes	$	(28,526	)	$	(21,377	)	$	(3,342	)

For the years ended

December

31,

2016,

2015,

2014,

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,
	2016			2015			2014
Income tax benefit using U.S. federal statutory rate	$	(9,696	)	$	(7,315	)	$	(1,136	)
Permanent differences		430			260			124
Orphan Drug credit permanent addback		1,437			1,310			674
State income taxes, net of federal benefit		(498	)		(808	)		(303	)
Tax credits		(4,846	)		(4,219	)		(2,176	)
Expired net operating losses and tax credits		-			-			312
Change in valuation allowance		8,804			9,782			4,394
Mark-to-market derivative liability		-			-			(1,779	)
Foreign rate differential		4,304			-			-
Other		65			990			(110	)
		-		$	-		$	-

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

	Year Ended December 31,
	2016			2015			2014
Net operating loss carryforwards	$	37,237		$	34,488		$	29,217
Federal and state tax credits		21,223			16,404			12,126
Accrued expenses		544			27			478
Patents		360			443			531
Stock-based compensation		1,353			596			92
Other		321			276			8
		61,038			52,234			42,452
Valuation allowance		(61,038	)		(52,234	)		(42,452	)
Net deferred tax asset	$	-		$	-		$	-

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,

2016,

2015

and

2014.

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. The valuation allowance increased by 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 by 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.

Subject to the limitations described below, as of

December

31,

2016,

2015,

and

2014,

the Company has net operating loss carryforwards of approximately

$101.4

million,

$94.2

million, and

$78.3

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

2026

and

2036.

The Company has an additional

$0.6

million of net operating losses in

2016

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,

2016,

2015,

and

2014,

the Company has state net operating loss carryforwards of approximately

$53.0

million,

$46.4

million, and

$55.1

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

2023

and

2036.

As of

December

31,

2016,

2015

and

2014,

the Company has tax credit carryforwards of approximately

$21.8

million,

$16.9

million and

$12.5

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

2026

and

2036.

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.

The Company had no unrecognized tax benefits or related interest and penalties accrued during the years ended

December

31,

2016,

2015,

and

2014.

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,

2013

through

2016,

although carryforward attributes that were generated prior to tax year

2013

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.

The deferred tax assets above exclude

$0.6

million of tax effected net operating losses related to tax deductions from the exercise of stock options subsequent to the adoption of the

2006

accounting standard on stock-based compensation. This amount represents an excess tax benefit and has not been included in the gross deferred tax assets. The Company will adopt ASU

2016

09,

Improvements to Employee Share-Based Payment Accounting, for the quarter ended

March

31,

2017.

As a result of adoption, the deferred tax assets associated with net operating losses will increase by

$0.6

million. These amounts will be offset by a corresponding increase in the valuation allowance.