Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Dec. 31, 2015
Income Tax Disclosure [Abstract]  
Income Taxes



The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.


The income tax provision (benefit) is composed of the following at December 31:


    2015     2014  
    Federal     State     Total     Federal     State     Total  
Current   $ -     $ -     $ -     $ -     $ -     $ -  
Deferred     -       -       -       -       -       -  
                    $ -                     $ -  


The following table presents a reconciliation of the statutory Federal rate and the Company’s effective tax rate for the years ended December 31:


    2015     2014  
Tax provision (benefit) at Federal statutory rate     (34.00 )%     (34.00 )%
Accrued compensation     (0.70 )%     (0.54 )%
Accrued interest expense     (0.00 )%     (1.31 )%
Stock based compensation     15.32 %     23.34 %
Depreciation and amortization     0.22 %     (0.08 )%
Other     0.06 %     0.10 %
Change in valuation allowance     19.10 %     12.49 %
Effective tax rate     0.00 %     0.00 %


The effective tax rate for the years ended December 31, 2015 and 2014, differs from the statutory rate of 34% as a result of the state taxes (net of Federal benefit) and permanent differences.


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. The following table presents significant components of the Company’s deferred tax assets and liabilities for the years ended December 31:


    2015     2014  
Deferred tax assets:                
Net operating loss carryforwards   $ 11,532,857     $ 11,265,332  
Stock based compensation     733,206       4,459,732  
Accrued compensation     1,485,827       1,525,089  
Credit carryforwards     106,856       124,525  
Amortization     -       1,755  
Gross deferred tax assets     13,858,746       17,376,433  
Less valuation allowance     (13,768,801 )     (17,321,688 )
Net deferred tax assets     89,945       54,745  
Deferred tax liabilities:                
Depreciation     (89,945 )     (54,745 )
Gain on sale of assets     -       -  
Gross deferred tax liabilities     (89,945 )     (54,745 )
Net deferred tax assets   $ -     $ -  


As of December 31, 2015, the Company had Federal net operating loss carryforward of $30,171,769. The net operating loss carryforward expires at various dates beginning in 2026 if not utilized. In addition, the Company had net operating losses for Hawaii income tax purposes of $25,550,778 as of December 31, 2015, which expire at various dates beginning in 2026 if not utilized. These amounts differ from the Company’s accumulated deficit due to permanent and temporary tax differences.


The Company’s valuation allowance was primarily related to the operating losses. The valuation allowance is determined in accordance with the provisions of ASC No. 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses, management provides no assurance that the net deferred tax assets will be realized. As of December 31, 2015 and 2014, the Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of the deferred tax liabilities.


The Company is subject to taxation in the United States and two state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.


As of December 31, 2015, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest income or expense in its consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods.


The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.