NOTE 14. INCOME TAXES

The Company recorded a deferred tax liability of $10.9 million as of December 31, 2015 and 2014 related to the purchase of the AmiKet IPR&D. This deferred tax liability was recorded to account for the book vs. tax basis difference related to the IPR&D intangible asset, which was recorded in connection with the Merger. This deferred tax liability was excluded from sources of future taxable income, as the timing of its reversal cannot be predicted due to the indefinite life of this IPR&D. As such, this deferred tax liability cannot be used to offset the valuation allowance.

Deferred income taxes reflect the net 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 Company’s deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,” the Company recorded a valuation allowance to fully offset the gross deferred tax asset, because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets at December 31, 2015 and 2014.

At December 31 2015, the Company had deferred tax assets of $22.5 million, against which a full valuation allowance of $22.5 million had been recorded. The determination of this valuation allowance did not take into account the Company’s deferred tax liability for IPR&D assigned an indefinite life for book purposes, also known as a “naked credit”, in the amount of $10.9 million at December 31, 2015. The change in the valuation allowance for the year ended December 31, 2015 was an increase of $3.5 million. The increase in the valuation allowance for the year ended December 31, 2015 was mainly attributable to an increase in net operating losses, which resulted in an increase in the deferred tax assets with a corresponding valuation allowance. Significant components of the Company’s deferred tax assets at December 31, 2015 and 2014 are as follows ($ in thousands):

	December 31,
	2015		2014
Deferred tax assets:
Property, plant & equipment	$	1	$	688
Patents and other intangible assets		-		359
Accrued liabilities		503		119
Other		45		57
Net operating loss carryforwards – U.S.		11,511		3,524
Net operating loss carryforwards – Israel		5,757		9,655
Stock-based compensation		4,659		4,616
Gross deferred tax assets		22,476		19,018
Valuation allowance		(22,476)		(19,018)
Gross deferred tax assets after valuation allowance		-		-
Deferred tax liability – AmiKet IPR&D assets		(10,870)		(10,870)
Net deferred tax liability	$	(10,870)	$	(10,870)

A reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2015 and 2014 is as follows:

	For the Year Ended
	December 31,
	2015			2014
U.S. federal statutory tax rate		34.0	%		34.0	%
State income taxes, net of federal benefit		4.0			4.4
U.S. vs. foreign tax rate differential		(2.4)			(1.9)
Equity-based compensation		-			(4.5)
Other		(0.1)			1.4
Change in valuation allowance		(35.5)			(33.4)
Effective tax rate		-	%		-	%

The Company had approximately $81.2 million and $67.1 million of gross net operating loss (“NOL”) carryforwards (federal, state and Israel) as of December 31, 2015 and 2014, respectively. Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. The Company reduced its tax attributes (NOL’s and tax credits) as a result of the Company’s ownership changes in 2007, 2009, 2013 and 2015 and the limitation placed on the utilization of its tax attributes, as a substantial portion of the NOL’s and tax credits generated prior to the ownership changes will likely expire unused. The most significant reduction in tax attributes occurred in 2013 as a result of the Merger. The Company does not have any material foreign earnings, due to a history of losses in its foreign subsidiary. A reconciliation of the Company’s NOLs for the years ended December 31, 2015 and 2014 is as follows ($ in thousands):

	December 31,
	2015		2014
U.S. Federal NOL's	$	29,100	$	24,300
U.S. State NOL's		29,100		24,300
Israel NOL's		23,000		18,500
Total NOL’s	$	81,200	$	67,100

The Company’s federal and state NOL’s of $29.1 million each begin to expire after 2030 through 2033. The Company’s Israel NOL of $23.0 million does not expire.

The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. The Company has gross liabilities recorded of $50,000 for both years ended December 31, 2015 and 2014, to account for potential state income tax exposure. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and Israel and various states. Since the Company had losses in the past, all prior years that generated NOL’s are open and subject to audit examination in relation to the NOL generated from those years. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows ($ in thousands):

	2015		2014
Balance at January 1,	$	50	$	40
Additions related to tax positions		-		10
Reductions related to tax positions		-		-
Balance at December 31,	$	50	$	50

On May 1, 2015, the Company received a notice from New York State relating to audits of the 2011 to 2013 tax years. The Company has provided requested information to New York State and the Company does not expect this to have a material effect on the Company’s unrecognized tax benefits. As of December 31, 2015, the Company has not recorded any liabilities as a result of the audits. In addition, during the third quarter of 2015, the Company received tax notices from the Israeli Tax Authority relating to the 2010 to 2014 tax years. As of December 31, 2015, the Company has not recorded any liabilities as a result of the Israel tax notices as the Company is unable to determine whether any amounts will be due as a result of the receipt of the Israeli tax notices.