Annual report pursuant to Section 13 and 15(d)

19. Income Taxes

v3.3.1.900
19. Income Taxes
12 Months Ended
Dec. 31, 2015
Pro forma financial information  
19. Income Taxes

The provision for income taxes for the years ending December 31, 2015 and 2014 consists of the following:

 

    2015     2014  
Current            
   Federal   $ (7,710,000 )   $ -  
   State     -       -  
    $ (7,710,000 )     -  
                 
Deferred                
   Federal     -       -  
   State     50,000       26,051  
      50,000       26,051  
                 
                 
Tax provision   $ (7,660,000 )   $ 26,051  

 

For the year ended December 31, 2015, the Company recorded a deferred tax liability of approximately $7.7 million as a result of intangible assets subject to amortization acquired in our acquisition of Fidelity that are not amortizable for income tax purposes. As a result of the business combination, this recording of the deferred tax liability resulted in a release of $7.7 million of the valuation allowance against the Company's deferred tax assets and has been recorded as an income tax benefit during the year ended December 31, 2015. The tax benefit will be realized as we amortize the intangible assets over their estimated useful lives (See Note 5).

 

The following reconciles the Federal statutory tax rate to the effective income tax rate for the years ended December 31, 2015 and 2014:

 

    2015     2014  
    %     %  
Federal statutory rate     (34.0 )     (34.0 )
State net of federal tax     (3.6 )     (2.5 )
Permanent and other items     1.1       4.5  
Change in valuation allowance     (11.8 )     33.0  
      (48.3 )     1.0  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  In assessing the realizability of deferred tax assets, Management evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  Based on Management’s evaluation, it is more likely than not that the deferred tax asset will not be realized and as such a valuation allowance has been recorded as of December 31, 2015 and 2014.

 

The components of the Company's deferred tax assets and liabilities consist of the following at December 31, 2015 and 2014:

 

    2015     2014  
Deferred income tax assets:            
   Net operating losses   $ 32,569,000     $ 45,250,000  
   Allowance for doubtful accounts     77,000       67,000  
   Derivative liability     620,000       1,460,000  
   Accrued liabilities and other     1,037,000       693,000  
   Intangible assets     -       1,997,000  
      34,303,000       49,467,000  
Deferred income tax liabilities:                
   Intangible assets     3,305,000       -  
   Property and equipment     1,103,000       933,000  
   Debt discount     388,000       759,000  
      4,796,000       1,692,000  
Deferred tax asset, net     29,507,000       47,775,000  
                 
Less: Valuation Allowance     (29,507,000 )     (47,775,000 )
                 
Net Deferred Tax Assets   $ -     $ -  

 

At December 31, 2015 and 2014, the Company had federal net operating loss carryforwards of approximately $93.0 million and $132.0 million, respectively, which expire in varying amounts through December 31, 2035. Pursuant to Code Sec. 382 of the Internal Revenue Code (“the Code”), the utilization of net operating loss carryforwards may be limited as a result of a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently, the utilization of a portion of the net operating loss carryforwards is subject to certain limitations. For the year ended December 31, 2015, the Company evaluated the future utilization of its net operating losses ("NOLs") under Sec. 382 and concluded that it has a limitation in the future utilization of its NOLs of approximately $27 million before they expired. In addition, as a result of this evaluation there was a reduction of NOLs and valuation allowance of approximately $48 million.