Note 10 - Income Taxes

There was no current income tax provision for the years ended December 31, 2017, 2016 and 2015. There was a deferred income tax benefit of $9,050,249 and $617,672 for the years ended December 31, 2017 and 2016, respectively. There was no deferred income tax benefit for the year ended December 31, 2015.

The Company’s deferred tax assets as of December 31, 2017 and 2016 consist of the following:

	As of December 31,
	2017		2016
Deferred tax assets:
Net-operating loss carryforward	$	43,577,000	$	59,926,000
Stock-based compensation		5,726,000		9,279,000
In-Process R&D		2,259,000		4,050,000
Deferred revenue		11,064,000		-
R&D credit		5,604,000		3,962,000
Change in unrealized loss on marketable securities		46,000		178,000
Other		314,000		316,000
Total Deferred Tax Assets		68,590,000		77,711,000
Valuation allowance		(63,718,000)		(77,711,000)
Deferred Tax Asset, Net of Allowance	$	4,872,000	$	-
In-process research and development (Assembly Merger)		7,007,802		11,119,651
Net Deferred Tax Liability	$	2,135,802	$	11,119,651

On December 22, 2017, the Tax Act, was signed into law. Among other items, the Tax Act reduces the federal corporate tax rate to 21% from the existing applicable rate of 34%, effective January 1, 2018. As a result, the Company has recorded a decrease to its deferred tax assets of $24.7 million and to valuation allowance of $28.4 million, resulting in a net tax benefit of $3.7 million.

The Tax Act also permits an indefinite carry forward of net operating losses generated in taxable years ending after December 31, 2017, subject to a utilization limitation of 80% of taxable income. Due to the change in the carryforward period for post-2017 net operating losses, the Company has determined that it would be able to use the deferred tax liability associated with certain in-process research and development as a source of income in determining the realizability of its deferred tax assets. As a result, the Company recorded a $4.9 million income tax benefit from the reduction of its valuation allowance.

The Company ’s income tax benefit for the year ended December 31, 2017 of $9.1 million includes a tax benefit of $8.6 million related to the Tax Act.

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.

At December 31, 2017, the Company had potentially utilizable gross Federal net operating loss carryforwards of approximately $153.2 million, State net operating loss carry-forwards of approximately $165.0 million and research and development credit carry forward of approximately $5.6 million, all of which expire between 2027 and 2037.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (IRC), 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 performed an ownership change study through December 31, 2016 and has determined that a “change in ownership” as defined by IRC Section 382 and the rules and regulations promulgated thereunder, did occur in December 2010, January 2013 and October 2014. The Company is in the process of performing an ownership change study through December 31, 2017.

The following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the year ended December 31, 2017, 2016 and 2015:

	As of December 31,
	2017			2016			2015
Statutory Federal Income Tax Rate		(34.0)	%		(34.0)	%		(34.0)	%
State Taxes, Net of Federal Tax Benefit		(2.6)	%		(4.3)	%		(11.0)	%
Merger Cost		-	%		-	%		0.9	%
Stock based Compensation		-	%		3.4	%		16.7	%
Credits		(2.1)	%		(1.8)	%		-	%
Federal Rate Change		47.7	%		-	%		-	%
State Rate Change		0.2	%		7.5	%		-	%
Other		0.3	%		2.3	%		0.1	%
Change in Valuation Allowance		(27.0)	%		25.5	%		27.3	%
Income Taxes Provision (Benefit)		(17.5)	%		(1.4)	%		-	%