Note 9 - Income Taxes

There was no current income tax provision for the years ended December 31, 2016, 2015 and 2014. There was a deferred income tax benefit of $617,672 for the years ended December 31, 2016. There was no deferred income tax benefit for the years ended December 31, 2015 and 2014.

The Company’s deferred tax assets as of December 31, 2016 and 2015 consist of the following:

	As of December 31,
	2016		2015
Deferred tax assets:
Net-operating loss carryforward	$	59,926,000	$	46,365,000
Stock-based compensation		9,279,000		10,397,000
In-Process R&D		4,050,000		5,282,000
R&D credit		3,962,000		3,068,000
Change in unrealized loss on marketable securities		178,000		368,000
Other		316,000		783,000
Total Deferred Tax Assets		77,711,000		66,263,000
Valuation allowance		(77,711,000)		(66,263,000)
Deferred Tax Asset, Net of Allowance	$	-	$	-
In-process research and development (Assembly Merger)		11,119,651		11,600,000
Deferred Tax Liability	$	11,119,651	$	11,600,000

The Company maintains a valuation allowance on deferred tax assets due to the uncertainty regarding the ability to utilize these deferred tax assets in the future. The deferred tax liability was recorded in connection with the acquisition of Assembly Pharmaceuticals in 2014 and relates to the difference between the carrying amount of in-process research and development for financial statement purposes relative to the amount used for income tax purposes. The deferred tax liability was $11.1 and $11.6 million as of December 31, 2016 and 2015, respectively.

At December 31, 2016, the Company had potentially utilizable gross Federal net operating loss carryforwards of approximately $146.5 million, State net operating loss carry-forwards of approximately $174.0 million and research and development credit carry forward of approximately $4.0 million, all of which expire between 2027 and 2036.

Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes to an annual limitation in the event of certain ownership changes, as defined. The Company has undergone an ownership change study and has determined that a “change in ownership” as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, did occur in December 2010, January 2013 and October 2014. Accordingly, approximately $39.1 million of the Company’s net operating loss carryforwards will expire unused and not be available to offset future taxable income. Based on the company having undergone multiple ownership changes throughout their history these net operating loss carryforwards before the October 2014 ownership change will free up over their carryforward periods.

The following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the year ended December 31, 2016, 2015 and 2014:

	As of December 31,
	2016			2015			2014
Statutory Federal Income Tax Rate		(34.0)	%		(34.0)	%		(34.0)	%
State Taxes, Net of Federal Tax Benefit		(4.3)	%		(11.0)	%		(11.0)	%
Merger Cost		-	%		0.9	%		-	%
Stock based Compensation - ISOs		3.4	%		16.7	%		-	%
Credits		(1.8)	%		-	%		-	%
Rate Change		7.5	%		-	%		-	%
Other		2.3	%		0.1	%		-	%
Change in Valuation Allowance		25.5	%		27.3	%		45.0	%
Income Taxes Provision (Benefit)		(1.4)	%		-	%		-	%