INCOME TAXES

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 19: INCOME TAXES 

At December 31, 2016, the Company had net operating loss carry forwards of approximately $60 million and $46 million for federal and state purposes, respectively. The net operating loss carry forwards will begin to expire in 2031.

          Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. The Company most likely has experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, the Company’s ability to utilize the aforementioned carry forwards may be limited. Cellegy’s merger with Adamis as described in Note 1, may also impact the ability for the Company to utilize certain of its net operating loss carry forwards. Additionally, U.S. tax laws limit the time during which these carry forwards may be applied against future taxes, therefore, the Company may not be able to take full advantage of these carry forwards for federal income tax purposes. The Company determined that the net operating loss carry forwards relating to Cellegy and Biosyn are limited due to the acquisitions, in 2009 and 2004, and has removed the associated net operating losses from the estimated amount of usable net operating loss carry forwards in its deferred tax assets below, as well as from the total of net operating loss carry forwards described above.

The benefit for income taxes from continuing operations consists of the following for the year ended December 31, 2016 and December 31, 2015: 

	December 31, 2016			December 31, 2015
Current	$	12,000		$	—
Deferred		(7,061,000	)		(5,904,000	)
Total		(7,049,000	)		(5,904,000	)
Change in Valuation Allowance		2,474,000			5,904,000
Tax Benefit, net	$	(4,575,000	)	$	—

At December 31, 2016 and December 31, 2015 the significant components of the deferred tax assets from continuing operations are summarized below:

	December 31, 2016			December 31, 2015
Deferred Tax Assets
Net Operating Losses Carry forwards	$	22,998,800		$	15,486,000
Stock Compensation		739,100			1,601,500
Fixed Assets		—			380,900
Accrued Expenses		678,600			296,100
Total Deferred Tax Assets		24,416,500			17,764,500
Valuation Allowance		(20,239,100	)		(17,764,500	)
	$	4,177,400		$	—
Deferred Tax Liabilities
Intangibles	$	(4,605,400	)	$	—
Fixed Assets		(400,600	)		—
Total Deferred Tax Liabilities		(5,006,000	)		—
Net Deferred Tax Liability	$	(828,600	)	$	—

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. 

We have determined at December 31, 2016 and December 31, 2015 that a full valuation allowance would be required against of all our operating loss carry forwards and deferred tax assets that we do not expect to be utilized by deferred tax liabilities.

The following table reconciles our losses from continuing operations before income taxes for the year ended December 31, 2016 and December 31, 2015.

	December 31, 2016					December 31, 2015
Federal Statutory Rate	$	(8,167,000	)	34.00	%	$	(4,614,000	)	34.00	%
State Income Tax, net of Federal Tax		(911,000	)	3.83	%		(790,000	)	5.83	%
Other Permanent Differences		925,000		(3.85	%)		32,000		(0.24	%)
Prior Year True-Up		1,323,000		(5.51	%)		—		0.00	%
Change in State Rate		(219,000	)	0.88	%		(532,000	)	3.91	%
Change in Valuation Allowance		2,474,000		(10.30	%)		5,904,000		(43.50	%)
Expected Tax Benefit	$	(4,575,000	)	19.05	%	$	—

Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. For the tax year ended December 31, 2016, the Company recognized no interest or penalties. 

In connection with the acquisition of USC on April 11, 2016, for financial statement purposes, the Company recorded the acquired assets at the purchase price. For tax purposes, the assets in USC are not recorded at the purchase price and instead remain at the historic tax basis. The excess book basis over tax basis results in a deferred tax liability that gets recorded through acquisition goodwill. In the current year, the Company recorded a net deferred tax liability of $5,416,000 through acquisition goodwill.

Of the $5,416,000 net deferred tax liability recorded, $829,000 was for indefinite-lived intangible assets. Under ASC 740, a deferred tax liability for indefinite-lived intangibles is not a source of future taxable income that can be netted with deferred tax assets. The remaining $4,587,000 of the net deferred tax liability represents a source of future taxable income which, when recognized, will be offset with the Company’s current year operating losses and existing net operating loss carryforwards. The Company has determined that a full valuation allowance is required against its deferred tax assets, including its net operating loss carryforwards. However, valuation allowance is no longer required to offset net operating losses to the extent of the future taxable income generated by the reversing deferred tax liability. Accordingly, the valuation allowance has been reduced by $4,587,000. Under ASC 740, the reduction in the valuation allowance results in a deferred tax benefit in the current year.