10.

Income Taxes

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

	Year Ended December 31,
	2019			2018
Domestic	$	(14,965	)	$	(17,855	)
Foreign		(27	)		(2,874	)
Total	$	(14,992	)	$	(20,729	)

For the years ended

December 31, 2019

and

2018,

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,
	2019			2018
Income tax benefit computed at federal statutory tax rate	$	(3,148	)	$	(4,348	)
Permanent differences		1			6
Write-off of deferred tax asset		2,048			-
Stock compensation - permanent items		-			325
State income taxes, net of federal benefit		(930	)		(958	)
Tax credits		(465	)		(1,466	)
Change in valuation allowance		2,449			5,409
Foreign rate differential		5			602
Other		40			430
Total	$	-		$	-

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

	Year Ended December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	11,090		$	6,742
Federal and state tax credits		3,587			3,122
Accrued expenses		-			411
Patents		74			132
Stock-based compensation		-			1,782
Other		59			169
Total deferred tax assets		14,810			12,358
Valuation allowance		(14,810	)		(12,358	)
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, 2019

and

2018.

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 expects that there will be an ownership change in excess of

50%

in connection with the consummation of the Merger on

January 9, 2020.

This will substantially limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities, the amount of which has

not

yet been determined.

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

$2.4

million during the year ended

December 31, 2019.

This was due primarily to the generation of net operating losses. In the year ended

December 31, 2018,

the valuation allowance increased by approximately

$5.4

million. This was 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, 2019

and

2018

the Company has net operating loss carryforwards of approximately

$41.7

million and

$25.7

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, 2019

are approximately

$30.6

million. As of

December 31, 2019

and

2018,

the Company has state net operating loss carryforwards of approximately

$37.2

million and

$21.5

million, respectively, to offset future state taxable income, which will expire at various dates through

2039.

As of

December 31, 2019

and

2018,

the Company has tax credit carryforwards of approximately

$3.6

million and

$3.1

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

2039.

The Company had

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

December 31, 2019

and

2018.

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, 2016

through

2019,

although carryforward attributes that were generated prior to tax year

2016

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.