Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2016

Significant components of the income taxes (benefit) were as follows for the years ended December 31, 2016 and December 31, 2015.

		2016	2015
Current
State	$	170,000	$	22,000
Federal		4,017,000		71,000
Total Current Tax Expense		4,187,000		93,000

Deferred
State		163,000		(48,000	)
Federal		4,588,000		(167,000	)
Total Deferred Tax Expense		4,751,000		(215,000	)

Total Income Taxes (Benefit)	$	8,938,000	$	(122,000	)

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


	2016		2015
Deferred tax assets:
Net operating carryforwards		—	$	6,819,000
Options, warrants and restricted stock units		207,000		419,000
	$	207,000	$	7,238,000

Valuation allowance		—		(2,280,000	)
Net deferred tax assets	$	207,000	$	4,958,000

The Company utilized its remaining federal, state and local net operating loss carry-forwards of approximately $20.7 million in 2016.

The reconciliation between the taxes as shown and the amount that would be computed by applying the statutory federal income tax rate to the net income before income taxes is as follows:

	Year Ended
	December 31,
	2016	2015

Income tax - statutory rate	34.0%	34.0%
State and local, net	1.03%	1.16%
Other – Net	0.3%	1.82%
Change in Valuation allowance on deferred tax assets	(7.3)%	(40.06)%
	28.03%	(3.08)%

While only the tax returns for the four years ended prior to December 31, 2016 are open for examination for taxes payable for those years, tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent that they generated loss carry forwards that are available for those future years.

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 (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 that it does not distribute to its shareholders.