11.

Income Taxes

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

	Year Ended December 31,
	2017			2016			2015
Domestic	$	(24,803	)	$	(15,860	)	$	(21,377	)
Foreign		(5,161	)		(12,666	)		-
Loss before income taxes	$	(29,964	)	$	(28,526	)	$	(21,377	)

For the years ended

December 31, 2017,

2016,

2015,

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,
	2017			2016			2015
Income tax benefit using U.S. federal statutory rate	$	(10,186	)	$	(9,696	)	$	(7,315	)
Permanent differences		4			430			260
Stock Compensation - Perm Items		689			-			-
R&D Credit -Perm Items		1,751			1,437			1,310
State income taxes, net of federal benefit		(853	)		(498	)		(808	)
Tax credits		(5,495	)		(4,846	)		(4,219	)
Change in valuation allowance		(54,319	)		8,804			9,782
Foreign rate differential		1,752			4,304			-
Rate change		2,202			-			-
382 Limitation		64,975			-			-
Other		(520	)		65			990
	$	-		$	-		$	-

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

	Year Ended December 31,
	2017			2015			2014
Net operating loss carryforwards	$	2,651		$	42,156		$	34,488
Federal and state tax credits		2,244			21,223			16,404
Accrued expenses		399			544			27
Patents		191			360			443
Stock-based compensation		1,262			1,353			596
Other		202			320			276
		6,949			65,956			52,234
Valuation allowance		(6,949	)		(65,956	)		(52,234	)
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, 2017,

2016,

and

2015.

December 22, 2017,

the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”) 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 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

consolidated financial statements. Our preliminary estimate of the TCJA and the remeasurement of our 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 TCJA

may

require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but

later than

one

year from the enactment of the TCJA

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 (

“§382

limitation”). 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 affected) 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

$13.1

million during the year ended

December 31, 2017.

This was due primarily to the addition of Orphan Drug Tax credits and the generation of net operating losses. However, this increase was offset by a reduction of

$65.0

million due the

§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 of

$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. 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.

Subject to the limitations described above, as of

December 31, 2017,

2016,

and

2015,

the Company has net operating loss carryforwards of approximately

$10.6

million,

$101.4

million, and

$94.2

million, respectively, to offset future federal taxable income, which will expire during

2037.

As of

December 31, 2017,

2016,

and

2015,

the Company has state net operating loss carryforwards of approximately

$6.8

million,

$53.0

million, and

$46.4

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

2032

and

2037.

As of

December 31, 2017,

2016

and

2015,

the Company has tax credit carryforwards of approximately

$2.3

million,

$21.8

million and

$16.9

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

2022

and

2037.

The Company had

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

December 31, 2017,

2016,

and

2015.

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, 2014

through

2017,

although carryforward attributes that were generated prior to tax year

2014

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.

The Company has adopted 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 were increased by

$0.6

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