Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2014

As of December 31, 2014 and 2013, our deferred tax assets were approximately $63.2 million and $49.2 million, respectively. The components of our deferred tax assets are summarized as follows:



	As of December 31,
	2014			2013
Deferred tax assets:
Net operating loss carryforwards	$	50,117,798		$	37,191,826
R&D credit carryforwards	8,394,408			7,388,463
Stock compensation	1,849,847			1,962,472
Intangibles	1,931,193			2,206,593
Temporary differences	910,354			455,767
Deferred tax assets before valuation allowance	63,203,600			49,205,121
Valuation allowance	(63,203,600		)	(49,205,121		)
Net deferred tax assets	$	—		$	—

Current accounting standards require a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets may not be realized. Due to the uncertainty surrounding the realization of these deferred tax assets in future tax returns, all of the deferred tax assets have been fully offset by a valuation allowance at December 31, 2014 and 2013.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences or tax carryforwards as of December 31, 2014.

As of December 31, 2014 and 2013, we had U.S. net operating loss carryforwards of approximately $153.1 million and $118.5 million, respectively. Of that amount, $15.3 million and $15.2 million relates to stock-based compensation tax deductions in excess of book compensation expense (APIC NOLs) as of December 31, 2014 and 2013, respectively, that will be credited to additional paid-in capital when such deductions reduce taxes payable as determined on a "with-and-without" basis. Accordingly, these APIC NOLs will reduce federal taxes payable if realized in future periods, but NOLs related to such benefits are not included in the table above.

At December 31, 2014 and 2013, we had U.S. federal R&D credit carryforwards of approximately $8.0 million and $7.4 million, respectively.

U.S. net operating loss carryforwards of $20.8 million and R&D credit carryforwards of $1.1 million expired during 2014. There were no expirations during 2013. The details of our U.S. net operating loss and federal R&D credit carryforward amounts and expiration dates are summarized as follows:



		As of December 31, 2014
Generated	Expiration	U.S. Net Operating Loss Carryforwards		U.S. R&D Credit Carryforwards
1998	2018	$	17,142,781	$	1,173,387
1999	2019	—		130,359
2000	2020	—		71,713
2001	2021	—		39,128
2002	2022	1,282,447		5,350
2003	2023	337,714		2,905
2004	2024	1,237,146		22,861
2005	2025	3,246,062		218,332
2006	2026	3,127,238		365,541
2007	2027	2,863,443		342,898
2008	2028	2,826,656		531,539
2009	2029	13,753,769		596,843
2010	2030	5,425,105		1,094,449
2011	2031	1,904,744		1,950,744
2012	2032	28,541,353		468,008
2013	2033	36,840,453		374,406
2014	2034	34,576,527		648,252
Total carryforwards		$	153,105,438	$	8,036,715

The Tax Increase Prevention Act of 2014 (the Act) was signed into law by President Obama on December 19, 2014. The credit for certain research and experimentation expenses expired at the end of 2011. The Act extended the credit through the end of 2014.

During the years ended December 31, 2014, 2013, and 2012, Cardiosonix recorded losses for financial reporting purposes of $15,000, $13,000, and $14,000, respectively. As of December 31, 2014 and 2013, Cardiosonix had tax loss carryforwards in Israel of approximately $7.6 million. Under current Israeli tax law, net operating loss carryforwards do not expire. Due to the uncertainty surrounding the realization of the related deferred tax assets in future tax returns, all of the deferred tax assets have been fully offset by a valuation allowance at December 31, 2014 and 2013.

Under Sections 382 and 383 of the IRC of 1986, as amended, the utilization of U.S. net operating loss and R&D tax credit carryforwards may be limited under the change in stock ownership rules of the IRC. The Company has previously completed a Section 382 analysis and does not believe that a Section 382 ownership change has occurred that would impact utilization of the Company’s net operating loss and R&D tax credit carryforwards.

Reconciliations between the statutory federal income tax rate and our effective tax rate for continuing operations are as follows:



	Years Ended December 31,
	2014					2013					2012
	Amount			%		Amount			%		Amount			%
Benefit at statutory rate	$	(12,147,068	)	(34.0	)%	$	(14,517,816	)	(34.0	)%	$	(9,913,450	)	(34.0	)%
Adjustments to valuation allowance	12,925,380			36.2	%	15,399,021			36.1	%	8,604,147			29.5	%
Adjustments to R&D credit carryforwards	(340,886		)	(1.0	)%	(842,414		)	(2.0	)%	1,064,623			3.7	%
Permanent items and other	(437,426		)	(1.2	)%	(38,791		)	(0.1	)%	244,680			0.8	%
Benefit per financial statements	$	—				$	—				$	—

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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