Note 7 – Income Taxes (Restated)

As of December 31, 2013 and 2012, the types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts which gave rise to deferred taxes, and their tax effects were as follows:

	As of December 31,
	2013		2012
	Restated (in thousands)

Net operating loss carry forwards (NOL)	$	66,322	$	63,714
Capital loss		3,515		3,515
Write-off of long-lived assets		526		526
Amortization of intangibles		(210)		(670)
Stock-based compensation		2,596		2,596
Capitalized software development costs and fixed assets		-		136
Deferred revenue		870		1,568
Alternative minimum tax credit carry forward		43		43
Accruals		3,206		2,554
Impairment loss		2,752		2,752
Derivative gain/loss		10,296		9,375
Interest expense		4,437		4,437
Total deferred tax assets		95,354		90,546
Valuation allowance		(95,354)		(90,546)
Net deferred tax asset	$	-	$	-

Due to the uncertainty of the utilization and recoverability of the loss carry-forwards and other deferred tax assets, we have provided a valuation allowance for the deferred tax assets, as it is more likely than not that the deferred tax assets will not be realizable.

For the years ended December 31, 2013 and 2012, the income tax benefit differed from the amount computed by applying the statutory federal rate of 34% as follows:

		Year Ended December 31,
		2013		2012
		Restated (in thousands)
Benefit at federal statutory rate	$	(9,830)	$	(6,610)
State income taxes, net of federal benefit		(883)		(753)
Permanent and other difference, net		5,906		2,803
Increase in valuation allowance	$	4,808	$	(4,560)

During the year ended December 31, 2013, we determined that a deferred tax liability previously estimated to be realized by NeoMedia Europe GmbH should be reduced to zero based on certain economic changes of the subsidiary during 2013. The economic changes included, but were not limited to, the termination of its hardware business and related sales activities that allowed it to generate revenue independently in the local market or otherwise, and the completion of a repositioning of the subsidiary from a self-contained, revenue generating operation to a cost center primarily focused on research and development. As a result of the change in estimate, we recorded an income tax benefit of $706,000 to reduce the deferred tax liability to zero.

As of December 31, 2013, we had net operating loss carry forwards for federal tax purposes totaling approximately $111 million, which may be used to offset future taxable income and which, if unused, expire between 2014 and 2033, and net operating loss carry-forwards for Colorado tax purposes totaling $7.2 million. As a result of certain of our equity activities, we anticipate that the annual usage of our pre-1998 net operating loss carry forwards may be further restricted pursuant to the provisions of Section 382 of the Internal Revenue Code.

In addition to the above, our subsidiary NeoMedia Europe GmbH, had foreign operations and is not included in our consolidated income tax balances above. NeoMedia Europe GmbH did not have income tax expense during the years ended December 31, 2013 and 2012.

NeoMedia Europe GmbH has net operating loss carry forwards that are estimated to be $11.5 million and $11.4 million as of December 31, 2013 and 2012, respectively. Due to the uncertainty of the utilization and recoverability of the loss carry forwards, we have reserved for the deferred tax assets through a valuation allowance, as it is more likely than not that the deferred tax assets will not be realizable.

We have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended December 31, 2013. Our methods of accounting are based on established income tax principles in the Internal Revenue Code and are properly calculated and reflected within our income tax returns. In addition, we have filed income tax returns in all applicable jurisdictions in which we had material nexus warranting an income tax return filing.

We re-assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the years ended December 31, 2013 and 2012. Due to the carry forward of NOL’s, Federal and state income tax returns are subject to audit for varying periods beginning in 1992.