17. INCOME TAXES

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

17. INCOME TAXES

The income tax benefit recognized for the year ended December 31, 2014 results from the following:

US Taxes
Federal - Deferred		(67,904,637	)
State - Deferred		(17,246,920	)
Foreign
Federal - Current		1,639,408
Federal - Deferred		(1,833,864	)
Change in Valuation Allowance		63,807,415
	$	(21,538,598	)

Due to the Company’s loss and the valuation allowance related to the resulting tax benefit, there was no domestic income tax expense or benefit recognized for the years ended December 31, 2013, and 2012.

The reconciliation between the effective tax rate and the statutory rate is as follows:

	Years Ended December 31,
	2014			2013			2012
US Federal statutory income tax rate		35.00	%		35.00	%		0.00	%
State staxes		2.91			-0.27			0.00
Permanent non-deductible items		-0.66			0.00			0.00
Goodwill impairment		-7.13			0.00			0.00
Difference between Federal and Foreign Tax Rate		-1.20			0.00			0.00
Effect of valuation allowance		-21.12			-34.89			0.00
Other		-2.37			0.16			0.00
Effective income tax rate		5.43	%		0.00	%		0.00	%

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of the deferred income tax asset (liability) are as follows:

	Years Ended December 31,
	2014			2013			2012
Deferred tax assets:
Net operating loss (“NOL”) carryforwards	$	15,050,371		$	921,499		$	-
Stock compensation		2,647,482			123,782			-
Derivative liability		57,871,418			6,133,885			-
Tax credits		3,000,000			-			-
Other		1,184,572			-			-
Deferred tax liabilities:
Intangible assets		(11,677,612	)		-			-
Undistributed earnings of foreign subsidiary		(1,400,000	)		-			-
Original issue discount on debt instruments		(1,102,429	)		-			-
Basis difference in fixed assets		(1,429	)		(1,429	)		-
Other		-			-			-
Net deferred tax assets		65,572,373			7,177,737			-
Valuation allowance		(70,985,152	)		(7,177,737	)		-
Total deferred tax assets	$	(5,412,779	)	$	-		$	-

The Company has net operating loss carryforwards for federal purposes of $41,039,022 for the year ended December 31, 2014. The losses will begin expiring in 2033. The Company has varying amounts of state net operating losses. Additionally, the Company has approximately $3,433,563 of foreign net operating losses, and approximately $3,000,000 of U.S. foreign tax credits.

In assessing the possible 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 periods in which those differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In making this assessment, management did not believe that it was more likely than not that the Company will realize the benefits of the net deferred tax assets as of December 31, 2014.  This determination was based on cumulative net losses as of the balance sheet date.

In 2014, the Company completed the acquisitions of FIN, Vapestick, VIP, and Hardwire. During 2014, certain measurement-period adjustments were made with respect to certain deferred tax liabilities that were identified to exist on the acquisition date for each of these acquisitions. As a result, deferred tax liabilities have been recorded for the identifiable intangibles acquired in these acquisitions as the amounts are non-deductible for income tax. Goodwill and deferred tax liabilities were both increased by $33,964,158 during 2014 as a result of these measurement-period adjustments. The Company has also recognized deferred tax assets of $8,908,900 primarily related to net operating losses and mark to market adjustments on the Company’s warrants and derivatives, which offset the deferred tax liabilities. After subsequent realization of deferred tax liabilities from our acquisitions, the Company had a net long-term deferred tax liability of $5,412,779 as of December 31, 2014.

During 2014, there was no change to total gross unrecognized tax benefit. Management believes that there will not be a significant increase or decrease to the uncertain tax positions within 12 months of the reporting.

The Company quarterly evaluates the positive and negative evidence regarding the realization of net deferred tax assets. The carrying value of its net deferred tax assets is based on its belief that it is more likely than not that it will be unable to realize some of these deferred tax assets, primarily as a result of losses incurred during its limited history. As a result of this analysis, the Company projects that approximately $10.8 million of its deferred tax assets will not be realizable.

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expenses. To the extent accrued interest and penalties do not ultimately  become payable, amounts accrued will be reduced and reflected  as a reduction  of the overall income tax provision in the period that such determination  is made. There was no interest or penalties related to income tax matters for the years ended December 31, 2014, 2013 and 2012. The Company does not have any open years for audit as of December 31, 2014.