NOTE

– INCOME TAXES

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which whose temporary differences are expected to be recovered or settled.

There is no income tax provision in the accompanying statements of operations and comprehensive income due to the cumulative operating losses that indicate

100%

valuation allowance for the deferred tax assets and state income taxes is appropriate.

During

September

2013,

the Company experienced an "ownership change" as defined in Section

382

of the Internal Revenue Code which could potentially limit the ability to utilize the Company’s net operating losses (NOLs). The Company

may

have experienced additional “ownership change(s)” since

September

2013,

but a formal study has not yet been performed. The general limitation rules allow the Company to utilize its NOLs subject to an annual limitation that is determined by multiplying the federal long-term tax-exempt rate by the Company’s value immediately before the ownership change.

December

31,

2016,

the Company had approximately

$30.9

million of gross NOLs to reduce future federal taxable income, the majority of which are expected to be available for use in

2017,

subject to the Section

382

limitation described above. The federal NOLs will expire beginning in

2022

if unused. The Company also had approximately

$13.0

million of gross NOLs to reduce future state taxable income at

December

31,

2016,

which will expire in years

2022

through

2036

if unused. The Company’s net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At

December

31,

2016,

the federal and state valuation allowances were

$10.7

million and

$0.2

million, respectively.

March

31,

2017,

the Company had approximately

$31.4

million of gross NOLs to reduce future federal taxable income, the majority of which are expected to be available for use in

2018,

subject to the Section

382

limitation described above. The federal NOLs will expire beginning in

2022

if unused. The Company also had approximately

$13.2

million of gross NOLs to reduce future state taxable income at

March

31,

2017,

which will expire in years

2022

through

2037

if unused. The Company's net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At

March

31,

2017,

the federal and state valuation allowances were

$11.0

million and

$0.2

million, respectively.

The valuation allowance has been recorded due to the uncertainty of realization of the benefits associated with the net operating losses. Future events and changes in circumstances could cause this valuation allowance to change.

The components of deferred income taxes at

March

31,

2017

and

December

31,

2016

are as follows:

	March 31, 2017		December 31, 2016

Deferred Tax Asset:
Net Operating Loss	$	10,865,000	$	10,755,000
Other		343,000		189,000
Total Deferred Tax Asset		11,208,000		10,944,000
Less Valuation Allowance		11,208,000		10,944,000
Net Deferred Income Taxes	$	—	$	—