FEDERAL INCOME TAX

9 Months Ended

Sep. 30, 2012

FEDERAL INCOME TAX

NOTE 16 – FEDERAL INCOME TAX

The Company recorded a valuation allowance against deferred tax assets at September 30, 2012 and December 31, 2011, based on its estimate of future reversal and utilization. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to establish a full valuation allowance against the entire net deferred tax asset.

The significant change in stock ownership associated with the stock offering completed in August 2012 exposes the Company to Section 382 of the Internal Revenue Code of 1986, as amended (the Code), “Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change” which has the potential to substantially limit the Company’s ability to deduct certain built losses or to use tax loss and credit carryforwards. In the event an “ownership change” does not occur under Section 382 of the Code, the Company could have available up to $19.5 million (as of December 31, 2011) in net operating loss carryforwards which could be used to reduce taxes due on potential future income.

An initial analysis of the common stock offering suggests that the transaction triggered a “change in control” under Section 382 of the Code, which would result in the loss or reduction of the Company’s net operating loss carryforwards along with certain built in losses which could be utilized to offset potential future income. Due to the full deferred tax valuation allowance, there is presently no asset recorded for the benefit of net operating loss carryforwards. The relevant calculations under Section 382 of the Code are technical and highly complex , and management is conducting an ongoing, comprehensive review of the common stock offering to confirm whether a “change in control” has occurred.