NOTE

: INCOME TAXES

The Company accounts for income taxes using the asset and liability method, under which deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are

not

expected to be realized.

December 22, 2017,

the President signed into law the Tax Cut and Jobs Act of

2017

(the

“2017

Tax Act”). The

2017

Tax Act provisions applicable to the Company include a permanent reduction to the U.S. federal corporate income tax rate from

35%

21%,

the capitalization and amortization of research and development related expenses, and placing additional limits on the use of net operating losses. Under ASC Topic

740,

Accounting for Income Taxes

, companies are required to recognize the changes in the period of enactment.

During the year ended

December 31, 2017,

the Company recorded a reduction in the amount of

$1.9

million in the carrying value of the Company’s U.S. deferred tax assets resulting from the

2017

Tax Act’s reduction in the U.S. federal corporate income tax rate from

35%

21%,

which is fully offset by the valuation allowance.

The Company did

not

record an income tax benefit for its losses incurred for the years ending

December 31, 2018

2017,

due to uncertainty regarding utilization of its net operating loss carryforwards and due to its history of losses. The benefit for income taxes differs from the benefit computed by applying the federal statutory rate to loss before income taxes as follows:

	As of December 31,
	2018			2017
Expected federal income tax benefit	$	(2,395,036	)	$	(2,761,678	)
Stock compensation		169,957			197,336
Other permanent items		1,616			2,668
Effect of change in valuation allowance		2,223,463			(15,344,015	)
Prior year true-up					(126,031	)
Tax rate change					1,912,427
Effect of NOL limitation					16,119,293
Actual federal income tax benefit	$			$

The components of net deferred tax assets and liabilities are as follows:

	Year Ended December 31,
	2018			2017
Deferred tax assets
Obsolete inventory	$	21,881		$	21,881
Accrued vacation		33,755			31,051
Accrued bonuses		99,666
Stock-based compensation		968,170			620,789
Basis difference in fixed assets		33,241			33,241
Intangible assets, net		572,687			634,521
Contribution, carryforward		707			677
Net operating loss carryforwards		2,588,401			747,589
Capital loss carryforward		1,027,111			1,027,111
Valuation allowance		(5,312,769	)		(3,089,306	)
Deferred tax asset	$	32,850		$	27,554

Deferred tax liabilities
Other	$	(32,850	)	$	(27,554	)
Net deferred tax asset	$			$

Based on an assessment of all available evidence including, but

not

limited to the Company’s limited operating history in its core business and lack of profitability, uncertainties of the commercial viability of its technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, the Company has concluded that it is more likely than

not

that these net operating loss carryforwards and credits will

not

be realized and, as a result, a full valuation allowance has been recorded against the Company’s deferred income tax assets. Utilization of the net operating loss carryforwards

may

be subject to a substantial annual limitation due to ownership change limitations that

may

have occurred or that could occur in the future, as required by the Internal Revenue Code Section

382.

In general, an “ownership change,” as defined by the code, results from a transaction or series of transactions over a

three

-year period resulting in an ownership change of more than

percentage points of the outstanding stock of a company by certain stockholders or public groups. Any limitation

may

result in expiration of all or a portion of the net operating loss carryforwards before utilization. Since the Company’s initial public offering, ownership changes have triggered a Section

382

limitation, which limits the ability to utilize net operating loss carryforwards.

The Company has incurred net operating losses from inception. At

December 31, 2018,

the Company had domestic federal net operating loss carryforwards of approximately

$58.2

million. In

May

2018

and

October 2017,

the Company completed public offerings, which triggered ownership changes under section

382.

We believe that as of

December 31, 2018,

the gross net operating loss carryforwards have been limited to approximately $

12.3

million, which are available to reduce future taxable income. Federal net operating loss carryforwards generated through

December 31, 2017

expire at various dates beginning in

2029

through

2038,

while federal net operating loss carryforwards generated in

2018

not

expire. The Company recorded a valuation allowance against all of its net deferred tax assets of approximately

$5.3

million and

$3.1

million as of

December 31, 2018

and

2017,

respectively, for a net increase of

$2.2

million from

2017

2018

and a net decrease of

$15.5

million from

2016

2017.

The Company files income tax returns in the U.S. The Company is subject to tax examinations for the

2012

tax year and beyond. The Company has

unrecognized tax positions and does

not

believe there will be any material changes in its unrecognized tax positions over the next

months. The Company has

not

incurred any interest or penalties related to unrecognized tax positions. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expense.