Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

INCOME TAXES

9 Months Ended

Sep. 30, 2016

Significant components of the income taxes were as follows for the nine and three months ended:

	Nine Months Ended September 30,				Three Months Ended September 30,
	2016		2015		2016		2015
Current
State	$	173,000	$	22,000	$	89,000	$	12,000
Federal		4,025,000		44,000		3,728,000		14,000
Total Current Tax Expense		4,198,000		66,000		3,817,000		26,000

Deferred
State		154,000		16,000		30,000		16,000
Federal		4,389,000		912,000		1,429,000		246,000
Total Deferred Tax Expense		4,543,000		928,000		1,459,000		262,000
Total income taxes	$	8,741,000	$	994,000	$	5,276,000	$	288,000

Significant components of deferred tax assets as of September 30, 2016 and December 31, 2015 consist of the following:

	September 30,		December 31,
	2016		2015

Deferred tax assets:
Net operating carryforwards		—	$	6,819,000
Options, warrants and RSUs		415,000		419,000
	$	415,000	$	7,238,000

Valuation allowance		—		(2,280,000	)
Net deferred tax assets	$	415,000	$	4,958,000

The personal holding company ("PHC") rules under the Internal Revenue Code impose a 20% tax on a PHC's undistributed personal holding company income ("PHC Income"), which means, in general, taxable income subject to certain adjustments. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by 5 or fewer individuals at anytime during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the "Ownership Test") and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the "Income Test"). In the second half of 2016 to date (as well as prior years), the Company did not meet the Ownership Test. Due to the significant number of shares held by the Company's largest shareholders, the Company continually assesses its share ownership to determine whether it meets the Ownership Test. If the Ownership Test were met and the income generated by the Company were determined to constitute "royalties" within the meaning of the Income Test, the Company would constitute a PHC and the Company would be subject to a 20% tax on the amount of any PHC Income (which cannot be offset by NOLs) that it does not distribute to its shareholders.