Deferred income taxes are provided on a liability
method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income
tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to
be available to reduce taxable income.
At September 30, 2012, the Companys
deferred tax assets consist primarily of net operating loss carry forwards. For the nine months ended September 30, 2012, the material
reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements
consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period.
At September 30, 2012, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred
tax assets will not be realized.
As of September 30, 2012 and December 31, 2011,
the Company has a net operating loss carry forward of approximately $5.7 million and $5.4 million, respectively, which will expire
between years 2026 and 2032. Due to the change in ownership provisions of the Tax Reform Act of 1986, the Companys net operating
loss carry forwards could be subject to annual limitations should a change in ownership occur.