10.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the ability to realize 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. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.

As of December 31, 2016, the Company had approximately $31.9 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes, net of the potential Section 382 limitations. These federal NOL carry forwards expire between 2020 and 2036. Included in the recorded deferred tax asset, the Company had a benefit of approximately $28.5 million available to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2036. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic NOL may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Under existing income tax accounting standards such objective evidence is more heavily weighted in comparison to other subjective evidence such as our projections for future growth, tax planning and other tax strategies. A significant piece of objective negative evidence considered in management’s evaluation of the realizability of its deferred tax assets was the existence of cumulative losses over the latest three-year period. Management forecast future taxable income, but concluded that there may not be enough of a recovery before the end of the fiscal year to overcome the negative objective evidence of three years of cumulative losses. On the basis of this evaluation, management recorded a valuation allowance against all deferred tax assets. If management’s assumptions change and we determine we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.

The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and certain foreign countries. The Company may be subject to examination by the IRS for tax years 2003 and forward. The Company may be subject to examinations by various state taxing jurisdictions for tax years 2003 and forward. The Company may be subject to examination by various foreign countries for tax years 2014 forward. As of December 31, 2016, the Company is currently not under examination by the IRS, any state or foreign tax jurisdiction. The Company did not have any unrecognized tax benefits at either December 31, 2016 or 2015. In the future, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.

Income tax benefit is as follows for the years ended:

	DECEMBER 31,
	2016		2015

Current provision (benefit)
State	$	(63,457)	$	(110,930)
Foreign		7,948		41,424
Total		(55,509)		(69,506)

Deferred provision (benefit)
Foreign		(17,937)		(12,305)
Total		(17,937)		(12,305)

Income tax benefit	$	(73,446)	$	(81,811)

The benefit for income taxes results in effective rates, which differs from the federal and state statutory rate as follows for the years ended:

	DECEMBER 31,
	2016			2015

Statutory federal income tax rate		34.0	%		34.0	%
State income tax rate (net of federal benefit)		-0.1	%		-0.1	%
Non-deductible expenses		-0.4	%		-0.7	%
Change in valuation allowance		-28.9	%		-40.7	%
Foreign rate differential		-2.8	%		3.6	%
Return to accrual difference true-ups		-0.4	%		2.4	%
Other		0.5	%		2.1	%
Combined effective tax rate		1.9	%		0.6	%

The deferred tax assets (liabilities) consisted of the following:

	DECEMBER 31,
	2016		2015
Deferred tax assets:
Net operating loss carryforwards	$	10,875,880	$	9,441,549
Alternative minimum tax credit		45,650		45,650
Share-based compensation		369,231		304,869
Intangible amortization		1,106,767		1,354,223
Foreign depreciation		16,244		17,763
Depreciation		-		36,763
Other assets		278,247		181,706

Total deferred tax assets		12,692,019		11,382,523
Less: valuation allowance		(9,791,680)		(8,500,622)
Total deferred tax assets, net		2,900,339		2,881,901

Deferred tax liabilities:
Goodwill amortization		2,738,256		2,717,847
Depreciation		52,974		-
Foreign intangible amortization		447,811		447,811
Other liabilities		25,968		16,195
Foreign capitalized software costs		34,315		116,970

Total deferred tax liabilities		3,299,324		3,298,823

Net deferred tax liability	$	(398,985)	$	(416,922)

Changes in the valuation allowance for the years ended were as follows:

	DECEMBER 31,
	2016		2015

Beginning balance	$	(8,500,622)	$	(6,139,958)
Increases		(1,291,058)		(2,360,664)

Ending balance	$	(9,791,680)	$	(8,500,622)