Income Taxes

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

10. Income Taxes

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

	For the Years Ended December 31,
	2014			2013
Federal
Current	$	-		$	-
Deferred		5,453			(3,556	)
Increase in valuation allowance		(5,453	)		3,556
State and Local
Current		-
Deferred		(44	)		(644	)
Increase in valuation allowance		44			644
Change in valuation allowance		(5,409	)		4,200
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, 2014 and 2013:

	For the Years Ended December 31,
	2014			2013
U.S. statutory federal rate		(34.00	)%		(34.00	)%
State income tax, net of federal benefit		(3.43	)		(3.43	)
Other Permanent Differences		0.11			1.48
Change in Derivative Liability		(0.06	)		5.45
Reduction due to sale of subsidiary		-			7.12
Reduction due to change in NOL		55.1			-
		17.72			(23.38	)
Valuation Allowance		(17.72	)		23.38
Income tax provision (benefit)		-	%		-	%

At December 31, 2014 and 2013, 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,
	2014			2013
Deferred tax assets
Net operating loss carryforward	$	4,992		$	17,666
Stock-based compensation		8,087			3,688
Patent portfolio and other		2,865			-
Total deferred tax assets		15,944			21,354
Valuation allowance		(15,944	)		(21,354	)
Deferred tax assets, 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, 2014 and 2013. As of December 31, 2014, the change in valuation allowance is approximately $5.4 million.

As of December 31, 2014, the Company had federal and state net operating loss carryovers of approximately $11 million, which expire in 2034. During 2014, management analyzed the likelihood of utilization of NOL. As a result of that analysis, the gross deferred tax asset was reduced to approximately $5 million and only NOLs of approximately $11 million are deemed available for potential carryover. 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 the net operating loss 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, 2014 and 2013, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2014 and 2013. 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, 2014, the Company’s U.S. and state tax returns (New York and Maryland) remain subject to examination by tax authorities beginning with the tax return filed for the year ended December 31, 2011. At this time, the Company's 2013 federal tax return has been selected for examination by the Internal Revenue Service. The Company believes that its income tax positions would be sustained upon an audit and does not anticipate any adjustments that would result in material changes to its consolidated financial position.