13.

Income Taxes

Prior to the Merger, the Company was treated as a partnership for federal income tax purposes.

December 2017,

the

2017

Tax Act was enacted, which includes a number of changes to previously existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from

35%

21%

for tax years beginning after

December 31, 2017.

The

2017

Tax Act also provides for a

one

-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after

September 27, 2017

as well as prospective changes beginning in

2018,

including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.

2016,

the Company recorded a deferred tax liability of

$3.6

million for the basis differences associated with indefinite-lived in-process R&D assets. In

August 2016,

the Company abandoned future development efforts for the IPR&D asset associated with RES-

440

and recorded an impairment charge of

$1.0

million which is equal to its acquired value. Upon recognizing the impairment, the Company recognized an income tax benefit of

$0.4

million and reduced the carrying value of the related deferred tax liability as of

December

31,

2016

(See Note

). In

2017,

this deferred tax liability was further reduced by

$1.1

million as a result of the

2017

Tax Act.

Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:

	December 31, 2017			December 31, 2016
Deferred tax assets
Net operating loss carryforwards	$	5,310,628		$	7,547,296
Stock option compensation		2,141,973			2,720,186
Orphan Drug credits		2,537,039			1,218,069
Capitalized start-up costs and other		5,247,469			4,690,843
Valuation allowance		(15,237,109	)		(16,176,394	)
Net deferred tax asset		—

Deferred tax liabilities
Intangible assets		(2,223,678	)		(3,279,363	)
Net deferred tax liability		(2,223,678	)		(3,279,363	)

The Company does

not

have unrecognized tax benefits as of

December

31,

2017

December 31, 2016.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

The Company had net operating loss carryforwards (“NOL”) for federal and state income tax purposes at

December

31,

2017

of approximately:

Combined NOL Carryforwards:	December 31, 2017
Federal	$	20,629,817
State		20,640,700

The net operating loss carryforwards begin expiring in

2034

for federal income tax purposes and

2034

for state income tax purposes. In

January 2016,

the number of outstanding shares of RestorGenex common stock increased in connection with the Merger discussed in note

This increase in the number of shares outstanding

resulted in a change of ownership, under the provisions of Internal Revenue Code Section

382

and similar state provisions, and limits the Company’s ability to utilize these net operating loss carryforwards to offset future income. The amounts above reflect the amount of NOLs that the Company expects to be able to utilize as a result of the limitation. The Company's

2017

and

2018

financings

may

have also triggered an ownership change, which could further limit the Company's ability to utilize its NOL carryforwards. The Company has yet to determine this potential limitation. The Company recorded a

100%

valuation allowance of the deferred tax assets as of

December

31,

2017,

because of the uncertainty of their realization.

A reconciliation of income tax benefit at the statutory federal income tax rate and income taxes as reflected in the financial statements as of

December 31, 2017

and

2016

is as follows:

Rate reconciliation:	December 31, 2017			December 31, 2016
Federal tax benefit at statutory rate		(34.0	)%		(34.0	)%
State tax, net of Federal benefit		(16.3	)%		(2.3	)%
Change in fair value of warrant		(126.1	)%		—	%
Change in tax rate		205.5	%		—	%
Litigation settlement charge		—	%		4.6	%
Acquisition costs		—	%		2.8	%
Orphan drug credit		(36.0	)%		(4.4	)%
Change in valuation allowance		(38.8	)%		27.2	%
Stock compensation		1.2	%		4.2	%
Other		1.0	%		(0.1	)%
Total provision		(43.5	)%		(2.0	)%

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company

’s

2014

2016

tax years remain open and subject to examination.