Quarterly report pursuant to Section 13 or 15(d)


9 Months Ended
Sep. 30, 2016
Notes to Financial Statements  

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


    September 30,
    December 31,
Federal   $ 742,300     $ -  
State     -       -  
      742,300       -  
Federal     49,000       44,000  
State     -       -  
Total   $ 791,300     $ 44,000  


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


    September 30,
    December 31,
Deferred income tax assets:            
Allowance for bad debt   $ 70,000     $ 74,000  
Warrants and interest expense     4,002,000       3,412,000  
Derivatives expense     1,992,000       729,000  
Net operating loss     9,353,000       7,029,000  
      15,417,000       11,244,000  
Deferred income tax liabilities:                
Depreciation     (194,900 )     (44,000 )
Total     15,222,100       11,200,000  
Valuation allowance     (15,417,000 )     (11,244,000 )
Net deferred tax assets (liabilities)   $ (194,900 )   $ (44,000 )


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


As of September 30, 2016, and December 31, 2015, the Company had net operating loss carryforwards of approximately $26,700,000 and $18,600,000, respectively, which, if unused, will expire beginning in years 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 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.


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 September 30, 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 September 30, 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 three quarters ended September 30, 2016, IVXX produced and sold cannabis pure concentrates, both Black Oak and MediFarm operated medical marijuana dispensaries, subjecting the Company to the limits of Internal Revenue Code Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product. For the nine months ended September 30, 2016, the income tax expense is the tax on the gross sales in excess of direct costs that subject the Company to federal income tax pursuant to IRC Section 280E. The Company recorded a deferred tax liability related to the tax depreciation related to its cannabis operations in excess of that reported for financial reporting purposes.