Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

9. INCOME TAXES

The Company is subject to federal and state income taxes as regular (Subchapter C) corporation. As a result of continuing losses for tax purposes, the Company has historically not paid income taxes and has recorded a full valuation allowance against the net deferred tax asset.

The Company’s deferred tax assets are primarily the result of net operating losses (or NOLs). The Company has recorded a valuation allowance against its net deferred tax assets at December 31, 2016 as it is more likely than not that not all of the deferred tax assets will be realized. The valuation is based on management’s assessment that it is more likely than not the NOL carryforwards may not be realized in the foreseeable future due to objective negative evidence that the Company would not generate sufficient taxable income to realize the deferred tax assets.

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. Significant components of the Company’s deferred tax assets for federal and state income taxes as of December 31, 2016 and 2015 are as follows:

	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	2,760,000		$	18,950,000
Stock-based compensation		121,000			275,000
Reserves		-			24,000
Deferred rent		24,000			38,000
Research and development tax credits		166,000			136,000
Total deferred tax assets		3,071,000			19,423,000
Deferred tax liabilities:
Intangible assets		(628,000	)		(698,000	)
Depreciation		(48,000	)		(83,000	)
Reserves		(22,000	)		-
Total deferred tax liabilities		(698,000	)		(781,000	)
Net deferred tax assets		2,373,000			18,642,000
Less: Valuation allowance		(2,373,000	)		(18,642,000	)
Deferred tax assets, net of allowance	$	-		$	-

There were no tax interest or penalties recorded in the consolidated financial statements for the years ended December 31, 2016 and 2015.

In March 2016, the Company completed an Internal Revenue Code Section 382 study which determined that a cumulative three-year ownership change in excess of 50% had occurred in March 2016 due to a share repurchase. As a result, the Company’s available NOL was reduced from $47.4 million to $2.2 million during the first quarter of 2016. The Company’s available NOL at December 31, 2016 was approximately $7 million. The federal and state NOL’s are available to offset future taxable income and expire from 2017 through 2036 if not utilized.

The Company files numerous tax returns in various jurisdictions. The Company is not currently under examination by any taxing authority, nor has the Company signed any waiver of the statute of limitations with any taxing authority. The Company remains open to examination by major taxing jurisdictions from 2013 to date. The Company believes there are no unresolved tax issues or tax claims likely to be material to its financial position.

The effective tax rate for the years ended December 31, 2016 and 2015 is different from the tax benefit that would result from applying the statutory tax rates primarily due to the recognition of valuation allowances. In 2016, the valuation allowance decreased approximately $16,269,000 primarily related to the reduction of the Company’s NOLs.

ASC Topic 740-10 requires evaluation of uncertain tax positions. As of December 31, 2016, the Company has no material uncertain tax positions.