Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2015

15. Income Taxes

The Company has the following net deferred tax assets and liabilities at December 31, 2015 and 2014:

	December 31,
	2015			2014
Current deferred tax assets:
Allowance for doubtful accounts	$	-		$	-
Accrued expenses		-			58,200
Current deferred tax asset		-			58,200

Non-current deferred tax assets and liabilities:
Goodwill and intangible assets	$	(4,366,005	)	$	(5,932,461	)
Developed technology		(99,530	)		(126,516	)
Derivative liability		(161,163	)		(124,773	)
Allowance for doubtful accounts		27,160			-
Accrued expenses		1,455			-
Property and equipment		91,826			(160,361	)
Other deferred tax assets		28,928			1,135
Lease liability		255,517			-
Stock based compensation		392,382			219,293
Net operating loss		4,482,051			3,042,072
Valuation allowance		(5,595,529	)		-
Non-current deferred tax liability		(4,952,908	)		(3,081,611	)

Net deferred tax liability	$	(4,942,908	)	$	(3,023,411	)

The benefit for income taxes for the years ended December 31, 2015 and 2014 consists of the following:

	Year Ended December 31,
	2015		2014
Federal:
Current provision	$	-	$	-
Deferred provision (benefit)		1,682,036		(2,641,731	)
		1,682,036		(2,641,731	)

State:
Current provision	$	-	$	-
Deferred provision (benefit)		237,461		(420,377	)
		237,461		(420,377	)

Income tax expense (benefit)	$	1,919,497	$	(3,062,108	)

A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:

	December 31,
	2015			2014
Expected federal statutory rate		34.00	%		34.00	%
State income taxes, net of federal benefit		4.80	%		4.80	%
Effect of tax rate changes		0.00	%		3.81	%
Impairment expense		-28.31	%		0.00	%
Valuation allowance		-16.52	%		0.00	%
Meals and entertainment		-0.05	%		-0.17	%
Gain on bargain purchase option		0.00	%		2.50	%
Tax exempt interest income		0.00	%		0.92	%
Other		0.41	%		0.06	%
		(5.67	)%		45.92	%

The valuation allowance at December 31, 2015 was approximately $5,596,000. The net change in the valuation allowance during the year ended December 31, 2015 was an increase of approximately $5,596,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a valuation allowance as of December 31, 2015.

At December 31, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $11,552,000. The federal and state net operating loss carryforwards will expire, if not utilized, beginning December 31, 2033.

A tax benefit from uncertain tax positions may be recognized when it is more likely than not that the position that a tax position will be sustained upon examination. Management makes judgments as to the interpretation of the tax laws that may be challenged upon an audit and cause a change of tax liability. As of December 31, 2015 and 2014, the Company did not maintain a reserve for uncertain tax positions.

The Company files tax returns in multiple jurisdictions and is subject to examination in these jurisdictions. Significant jurisdictions in the US include New York, Illinois and California. In February 2016, the Company received notice that the 2014 tax return of old NAPW is being audited by the Internal Revenue Service.

Section 382 of the Internal Revenue Code (Section 382) imposes a limitation on a corporation's ability to utilize net operating loss carryforwards (NOLS) if it experiences an “ownership change” as defined within the Code. In general, an ownership change may result from transactions increasing the ownership of certain shareholders in the stock of a corporation by more than 50 percentage points over a three year period. As part of the Merger Consideration in connection with the acquisition of NAPW, the Company issued stock, options and warrants. The Company evaluated the ownership change pertaining to these issuances and determined that in accordance with the rules related to Section 382 and certain built in gain allowances pursuant to the Code and subsequent Internal Revenue Code Rulings and Notices the Company did not experience an ownership change that would limit the Company's ability to utilize its NOLS.