Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.6.0.2
Income Taxes
12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes

(7)

Income Taxes

 

(a)

Income Taxes

The December 31, 2016, 2015 and 2014 income tax provision is as follows:

 

 

 

For the Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

 

 

$

 

 

$

 

State and local

 

 

2,015

 

 

 

622

 

 

 

6,171

 

Total current provision

 

 

2,015

 

 

 

622

 

 

 

6,171

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

6,124

 

 

 

 

 

 

 

State and local

 

 

42

 

 

 

 

 

 

 

Total deferred provision

 

 

6,166

 

 

 

 

 

 

 

Total tax provision

 

$

8,181

 

 

$

622

 

 

$

6,171

 

 

 

 

(b)

Tax Rate Reconciliation

A reconciliation of the total income tax provision tax rate to the statutory federal income tax rate of 34% for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

 

 

For the Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Income taxes at statutory rates

 

$

1,272,242

 

 

$

(91,705

)

 

$

1,222,120

 

State income tax, net of federal benefit

 

 

2,054

 

 

 

411

 

 

 

4,132

 

Permanent items

 

 

171,704

 

 

 

171,963

 

 

 

111,001

 

Section 382 limitation expiration

 

 

 

 

 

 

 

 

1,712,466

 

Warrant liability

 

 

(156,498

)

 

 

(34,160

)

 

 

(947,432

)

Federal NOL expired

 

 

(206,133

)

 

 

 

 

 

 

Other

 

 

11,104

 

 

 

 

 

 

 

Research and development credit

 

 

(141,494

)

 

 

628,573

 

 

 

(143,114

)

Change in federal valuation allowance

 

 

(944,798

)

 

 

(674,460

)

 

 

(1,953,002

)

 

 

$

8,181

 

 

$

622

 

 

$

6,171

 

 

(c)

Significant Components of Current and Deferred Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are as follows:

 

 

 

For the Year Ended December 31,

 

 

 

2016

 

 

2015

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

6,786,922

 

 

$

9,008,344

 

Capitalization of patent costs, goodwill and amortization

 

 

332,901

 

 

 

441,076

 

Capitalization of acquisition costs

 

 

43,523

 

 

 

35,264

 

Research and AMT credits

 

 

1,689,883

 

 

 

1,421,251

 

Stock based compensation

 

 

160,182

 

 

 

180,675

 

Deferred lease obligation

 

 

182,550

 

 

 

274,164

 

Other timing differences

 

 

51,314

 

 

 

41,045

 

 

 

 

9,247,275

 

 

 

11,401,819

 

Less valuation allowance

 

 

(9,028,241

)

 

 

(11,103,399

)

Total deferred tax assets

 

$

219,034

 

 

$

298,420

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Fixed assets

 

 

(219,034

)

 

 

(298,420

)

Goodwill

 

 

(6,166

)

 

 

 

Total deferred tax liabilities

 

$

(225,200

)

 

$

(298,420

)

Total deferred tax assets (liabilities)

 

$

(6,166

)

 

$

 

 

The Company has established a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced. The Company has recorded a valuation allowance of $9,028,241 as of December 31, 2016 as it does not believe it is more likely than not that certain deferred tax assets will be realized due to the recent history of both pre-tax book income and losses, the lack of taxable income available in carryback periods or feasible tax-planning strategies, the limited existing taxable temporary differences, and the subjective nature of forecasting future taxable income into the future.  Should the Company continue to achieve substantial pre-tax book income during 2017 or be better able to forecast taxable income into the future, the Company may need to release a portion of their federal valuation allowance during 2017. Due to the Company’s relatively low apportionment in California, a release of state-related valuation allowance is unlikely. The Company decreased its valuation allowance by approximately $2,075,158 during the year ended December 31, 2016.

At December 31, 2016, the Company had federal and California tax loss carryforwards of approximately $17,914,514, and $7,873,156, respectively.  The federal and state net operating loss carry forwards begin to expire in 2020 and 2017, respectively, if unused.

At December 31, 2016, the Company had federal and state tax credit carry forwards of approximately $1,716,398, and $1,346,874, respectively, after reduction for uncertain tax positions.  The Company has not performed a formal research and development credit study with respect to these credits.  The federal credits will begin to expire in 2026, if unused, and the state credits carry forward indefinitely.  

Pursuant to the Internal Revenue Code of 1986, as amended (IRC), specifically IRC §382 and IRC §383, the Company’s ability to use net operating loss and research and development tax credit carry forwards (“tax attribute carry forwards”) to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year testing period. The Company has not completed an ownership change analysis pursuant to IRC Section 382 for taxable years ended after December 31, 2012. If ownership changes within the meaning of IRC Section 382 are identified as having occurred subsequent to 2012, the amount of remaining tax attribute carry forwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated.  Further, the Company’s deferred tax assets associated with such tax attributes could be significantly reduced upon realization of an ownership change within the meaning of IRC §382.

The following table summarizes the reconciliation of the unrecognized tax benefits activity during the years ended December 31, 2016 and 2015:

 

 

 

For the Year Ended December 31,

 

 

 

2016

 

 

2015

 

Beginning unrecognized tax benefits

 

$

1,408,000

 

 

$

1,408,000

 

Decreases related to prior year tax positions

 

 

(53,000

)

 

 

 

Increases related to current year tax positions

 

 

177,000

 

 

 

 

Ending unrecognized tax benefits

 

$

1,532,000

 

 

$

1,408,000

 

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets.  If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance.  The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.  The Company had no accrual for interest or penalties on the Company’s balance sheets as of December 31, 2016 or December 31, 2015, and has not recognized interest and/or penalties in the Statement of Operations for the year ended December 31, 2016.

The Company’s tax years that remain open and subject to examination by tax jurisdiction are years 2013 and forward for federal and years 2012 and forward for the state of California.