Annual report pursuant to Section 13 and 15(d)


12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  



The expense (benefit) for income taxes consists of the following:


    Year Ended December 31,  
    2016   2015  
Federal   $   $  
Federal         44,000  
Total Expense (Benefit) for Income Taxes   $   $ 44,000  


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


    December 31,    
    2016     2015    
Expected Income Tax Benefit at Statutory Tax Rate, Net   $ (9,469,000 )   $ (3,694,000 )  
Non-Deductible Items     1,263,000       368,000    
Warrants Expense           1,196,000    
Derivatives Expense           (545,000 )  
Net Operating Losses           2,667,000    
Change in Valuation Allowance     8,206,000       52,000    
Reported Income Tax Expense   $     $ 44,000    
Effective Tax Rate     –   %       (0.49% )  


The components of deferred income tax assets and deferred income tax liabilities are as follows:


    December 31,    
    2016     2015    
Deferred Income Tax Assets:                  
Allowance for Bad Debt   $     $ 74,000    
Warrants Expense     4,186,000       3,412,000    
Derivatives Expense     4,067,000       729,000    
Net Operating Losses     15,242,000       7,029,000    
Deferred Income Tax Liabilities:                  
Depreciation     (1,334,000 )     (44,000 )  
Total     22,161,000       11,200,000    
Valuation Allowance     (22,161,000 )     (11,244,000 )  
Net Deferred Tax Liabilities   $     $ (44,000 )  


Permanent differences include ordinary and necessary business expenses deemed by the Company as a non-allowable deduction under IRC Section 280E, and tax deductions related to equity compensation that are less than the compensation recognized for financial reporting.


As of December 31, 2016, and 2015, the Company had net operating loss carryforwards of approximately $34,940,000 and $16,250,000, respectively, which, if unused, will expire beginning in the year 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under Internal Revenue Code (“IRC”) Section 382, which will limit their utilization. The Company has yet to assess the effect of these limitations, but expects these losses to be substantially limited. Accordingly, the Company has placed a reserve against any assets associated with these losses.


The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years from 2012 to 2016 are subject to examination.


Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred through the period ended December 31, 2016. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of has been recorded against all deferred tax assets as these assets are more likely than not to be unrealized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.


For the years ended December 31, 2016, 2015 and 2014, certain of the Company’s subsidiaries produced and sold cannabis or cannabis pure concentrates, subjecting the Company to the limits of IRC Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product. The Company has allocated accelerated depreciation related to production equipment and other expenses directly related to sales of product, which results in a difference in the cost of sales for financial reporting and tax reporting taxable income. As a result, the Company had no current taxable income for the year ended December 31, 2016.