The Company’s provision for income taxes consists of the following:

 

		Year Ended June 30,
		2017			2016
Current:
Federal		$	-		$	-
State			4,000			13,704
Total current			4,000			13,704
Deferred:
Federal			26,613,369			273,000
State			30,412			38,000
Total deferred			26,643,781			311,000
Income tax provision		$	26,647,781		$	324,704

 

The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate for the years ended June 30, 2017 and 2016 are as follows:

 

		Year Ended June 30,
		2017			2016
Income taxes at the federal statutory rate		$	(1,894,749)		$	1,901,000			34.00	%
State income taxes, net of federal income tax effect			(143,944)			51,704			0.92	%
Permanent tax differences			1,135,075			(2,914,000)			52.13	%
481(a) adjustments			-			1,287,000			23.03	%
Change in valuation allowance			27,500,720			-			0.00	%
Other			679			(1,000)			-0.01	%
		$	26,647,781		$	324,704			5.81	%

 

The Company’s deferred tax assets and liabilities as of June 30, 2017 and 2016 are as follows:

 

		Year Ended June 30,
		2017			2016
Deferred tax assets:
Accrued compensation		$	615,000		$	395,000
Accounts receivable allowance			367,000			292,000
Intangible assets			287,000			352,000
Other liabilities			237,000			43,000
Net operating loss and other carryforwards			60,996,000			60,357,000
Total gross deferred assets			62,502,000			61,439,000
Less: Valuation Allowance			(49,247,000)			(21,745,000)
Deferred tax asset after valuation allowance			13,255,000			39,694,000
Deferred tax liabilities:
Depreciation			(705,000)			(644,000)
Warrant derivative			(331,000)			-
Change in accounting method			(371,000)			(557,000)
Total deferred tax liability			(1,407,000)			(1,201,000)
Net Deferred Tax Asset		$	11,848,000		$	38,493,000

 

In connection with the reverse merger, AEON elected to change from a cash basis tax payer to an accrual basis tax payer. This resulted in a change of accounting methodology which resulted in a built in gain that resulted in a deferred tax liability of approximately $1,498,000 as of the date of merger. The built in gain will be recognized for tax purposes over a four year period. Additionally, AEON elected to change their tax reporting year-end from a December 31 year-end to a June 30 year-end. This change was done to mirror AHC’s tax and reporting year.

 

Permanent tax differences for the year ended June 30, 2017 in the above reconciliation table primarily consist of goodwill impairment charges. Permanent tax differences for the year ended June 30, 2016 primarily consist of pre-acquisition income which is allocated to the former shareholders of AEON.

 

As of June 30, 2017, the Company has net operating loss carryforwards of approximately $239,700,000. As of June 30, 2017, Federal net operating loss carryforwards are approximately $166,600,000, which expire between 2019 and 2037. Approximately $5,300,000 of the federal net operating loss carryforwards are Separate Return Limitation Year (SRLY) and can only be used by the entity that generated these losses in separate return years. State net operating loss carryforwards are approximately $73,100,000, which expire between 2018 and 2037.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Based on the results of current year operations and future income statement projections, the Company’s valuation allowance increased during the year ended June 30, 2017 by approximately $27,500,000 to properly reflect the amount of deferred tax asset that is more likely than not to be realized.

 

The Company adopted the guidance in ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, during the fourth quarter of fiscal year June 30, 2016, and all deferred tax assets and liabilities are classified as long-term.