Income Taxes

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

11. Income Taxes

The income tax (benefit) provision consists of the following (in thousands):

	For the Years Ended December 31,
	2013			2012
Federal
Current	$	-		$	-
Deferred		(3,556	)		(1,304	)
State
Current		-			-
Deferred		(644	)		(132	)
Change in valuation allowance		4,200			1,436
Income tax provision (benefit)	$	-		$	-

The following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the years ended December 31, 2013 and 2012:

	For the Years Ended December 31,
	2013			2012
U.S. federal statutory rate		(34.00)	%		(34.00)	%
State and local income taxes, net of federal benefit		(3.43)			(3.43)
Other permanent differences		1.48			-
Change in fair value of warrant liabilities		5.45			3.63
Reduction in NOL due to sale of subsidiary		7.12			-
		(23.38)			(33.80)
Change in valuation allowance		23.38			33.80
Income tax provision (benefit)		-	%		-	%

At December 31, 2013 and 2012, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following (in thousands):

	For the Years Ended December 31,
Deferred tax asset	2013			2012
Net operating loss carryforward	$	17,666		$	16,852
Stock-based compensation and other		3,688			302
Total deferred tax assets		21,354			17,154
Valuation Allowance		(21,354	)		(17,154	)
Deferred tax asset, net of allowance	$	-		$	-

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The Company has determined that, based on objective evidence currently available, it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2013 and 2012. As of December 31, 2013, the change in valuation allowance is approximately $4.2 million.

As of December 31, 2013, the Company had federal and state net operating loss carryovers of approximately $47.2 million, which expire in 2019.  As a result of the Company's sale of its consulting subsidiary, prior year federal and state net operating loss for an aggregate of $3.4 million will not be utilized. The net operating loss carryover may be subject to limitation under Internal Revenue Code section 382, should there be a greater than 50% ownership change as determined under the regulations. The Company’s ability to utilize net operating loss and credit carry forwards may be limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in stock ownership in excess of 50% such that some net operating losses may never be utilized. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the IRC has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL’s before utilization.

As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2013 and 2012, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2013 and 2012. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and state income tax returns. As of December 31, 2013, the Company’s U.S. and state tax returns remain subject to examination by tax authorities beginning with the tax return filed for the year ended December 31, 2010.