Note 12. INCOME TAXES
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2017 and 2016. The following is a reconciliation of the expected tax expense (benefit) at the U.S. statutory rate to the actual tax expense (benefit) reflected in the accompanying statement of operations:
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| U.S. federal statutory rate | (3,353,056 | ) | 3,632,727 | |||||
| State and local taxes, net of federal benefit | (334,994 | ) | (227,984 | ) | ||||
| Change in fair value of derivatives | - | (5,186,749 | ) | |||||
| Settlement of warrants | - | (1,764,424 | ) | |||||
| Goodwill impairment | - | 1,080,186 | ||||||
| Change in valuation allowance | (3,717,877 | ) | 2,756,495 | |||||
| True-up & deferred adjustment | 1,619 | (220,327 | ) | |||||
| Stock based compensation | 258,394 | 15,826 | ||||||
| Other permanent items | 5,697 | (214,142 | ) | |||||
| Forfeitures & expiration of stock comp | 45,915 | 118,691 | ||||||
| Stock issuance costs & compensation wavers | - | 78,640 | ||||||
| Change in tax rate | 7,036,850 | (36,381 | ) | |||||
| Other | 57,452 | (32,558 | ) | |||||
| - | - | |||||||
As of December 31, 2017 and 2016, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current deferred tax assets: | ||||||||
| NOL & AMT credit carryforward | $ | 11,106,460 | $ | 15,853,308 | ||||
| Inventory reserves and allowances | 209,345 | 504,104 | ||||||
| Accrued expenses & deferred income | - | 35,413 | ||||||
| Charitable contribution | 3,767 | 2,110 | ||||||
| Stock based compensation | 1,712,623 | 46,168 | ||||||
| Net book value of intangible assets | 639,731 | 931,417 | ||||||
| Net book value of fixed assets | 6,727 | 24,010 | ||||||
| Total current deferred tax assets | 13,678,653 | 17,396,530 | ||||||
| Current deferred tax liabilities: | ||||||||
| Net book value of intangible assets | - | - | ||||||
| Total current deferred tax liabilities | - | - | ||||||
| Net current deferred tax assets | 13,678,653 | 17,396,530 | ||||||
| Valuation allowance | (13,678,653 | ) | (17,396,530 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the positive and negative evidence available, management has determined that a valuation allowance of $13,678,653 and $17,396,530 are required at December 31, 2017 and 2016, respectively, to reduce the deferred tax assets to amounts that are more likely than not to be realized. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax assets may be necessary.
At December 31, 2017 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $46,362,439 and $35,081,878, respectively. These NOLs expire beginning in 2030. Utilization of our NOLS may be subject to an annual limitation under section 382 and similar state provisions of the Internal Revenue Code due to changes of ownership that may have occurred or that could occur in the future, as defined under the regulations.
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2017 and 2016, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2017 and 2016. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and Alabama, Connecticut, Florida, Georgia, Massachusetts, New York, North Carolina, and Tennessee state income tax returns. As of December 31, 2017, the Company’s U.S. and state tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2014.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Company believes the impact of the inclusion of accumulated post-1986 foreign earnings on which U.S. income tax is currently deferred to a one-time transition tax on December 31, 2017 would not be material to the Company. The measurement of the transition tax liability requires extensive effort on the calculation of the foreign earnings and profit on a cumulative basis. The Company has made reasonable efforts to determine that there would be no material financial impact on this one-time transition tax as the Company believes its existing tax attributes can be used to offset the transition tax without limitation, but an election is available to not claim the net operating loss deduction against the mandatory foreign earnings inclusion at December 31, 2017.
Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. Due to the change in the federal tax rate from 34% to 21%, which in turn changes the effective state tax rate from 3.69% to 4.41%, the Company’s gross deferred tax assets of approximately $20.7 million will be revalued to approximately $13.7 million with a corresponding offset to the valuation allowance. Any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our recorded deferred tax liabilities and the one-time transition tax. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.