Income Taxes
Income tax expense/(benefit) from continuing operations consisted of the following for the periods indicated:
|
| | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 |
Current: | | | |
Federal | $ | (320,560 | ) | | $ | — |
|
State | 24,807 |
| | (135,567 | ) |
Deferred federal | — |
| | — |
|
Deferred state | — |
| | — |
|
Income tax benefit | $ | (295,753 | ) | | $ | (135,567 | ) |
Deferred tax assets and liabilities consist of the following components:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| Current | | Long-Term | | Current | | Long-Term |
Bad debt and inventory reserve | $ | — |
| | $ | 226,358 |
| | $ | 382,075 |
| | $ | — |
|
Inventory adjustment | — |
| | 405,242 |
| | — |
| | 940,885 |
|
UNICAP | — |
| | 32,579 |
| | — |
| | 46,593 |
|
Deferred revenue |
|
| | 84,669 |
| | — |
| | 154,608 |
|
Deferred rent | — |
| | 340,199 |
| | — |
| | 550,419 |
|
Depreciation and amortization | — |
| | (1,238,458 | ) | | — |
| | (3,490,869 | ) |
Charitable contributions | — |
| | 3,385 |
| | — |
| | 5,741 |
|
Net operating loss carryforwards- Luna | — |
| | 349,421 |
| | — |
| | 4,779,976 |
|
Net operating loss carryforwards- API | — |
| | 1,436,568 |
| | — |
| | 9,783,512 |
|
Net operating loss carryforwards - state | — |
| | 534,194 |
| | — |
| | 281,799 |
|
Net operating loss carryforwards- Canada | — |
| | 10,503 |
| | — |
| | 10,503 |
|
Research and development credits | — |
| | 235,613 |
| | — |
| | 4,250,803 |
|
California manufacturing credit | — |
| | 15,554 |
| | — |
| | 15,554 |
|
Accrued liabilities | — |
| | 504,472 |
| | 1,067,019 |
| | — |
|
Deferred compensation | — |
| | 223,607 |
| | — |
| | 267,897 |
|
Stock-based compensation | — |
| | 1,275,371 |
| | — |
| | 1,867,947 |
|
AMT credit | — |
| | 581,467 |
| | — |
| | 395,083 |
|
Total | — |
| | 5,020,744 |
| | 1,449,094 |
| | 19,860,451 |
|
Valuation allowance | — |
| | (5,020,744 | ) | | (1,449,094 | ) | | (19,860,451 | ) |
Net deferred tax asset | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
The benefit from income taxes from continuing operations differs from the amount computed by applying the federal statutory income tax rate to our loss from continuing operations before income taxes as follows for the periods indicated:
|
| | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
Income tax expense at federal statutory rate | | 34.00 | % | | 34.00 | % |
State taxes, net of federal tax effects | | (102.48 | )% | | (0.93 | )% |
Change in tax rate from Tax Cuts and Jobs Act | | (568.11 | )% | | — | % |
Change in valuation allowance | | 796.72 | % | | (18.17 | )% |
Incentive stock options | | (69.26 | )% | | (9.00 | )% |
Provision to return adjustments | | 27.75 | % | | (0.82 | )% |
Meals and entertainment | | (4.69 | )% | | (0.64 | )% |
Capitalized merger costs | | — | % | | — | % |
Windfall deduction | | — | % | | — | % |
Other permanent differences | | (25.48 | )% | | 0.35 | % |
Income tax benefit | | 88.45 | % | | 4.79 | % |
The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We have U.S. federal income tax net operating loss carryforwards at December 31, 2017 of approximately $1.7 million for Luna and net operating loss carryforwards of approximately $6.8 million for API expiring at varying dates through 2025. We have research and development tax credit carryforwards at December 31, 2017 of approximately $0.2 million, which expire at varying dates through 2024.
In 2015, we performed a formal section 382 study and determined that we do not have a limitation on our net operating loss available to offset future income for the Luna net operating losses. As a result of the acquisition of API, the API net operating loss carryover and research and development credits will be subject to the Section 382 limitation. A formal Section 382 study was prepared in 2017, and it was determined that there was no ownership changes in 2017 resulting in a limitation on NOLs, but a portion of the net operating losses will expire unutilized. As there is a full valuation allowance against all of the API deferred tax assets, there will not be a statement of operations impact to any expiration of the net operating losses or research and development credits.
The U.S. federal statute of limitations remains open for the year 2014 and onward. We currently have no federal income tax returns under examination. U.S. state jurisdictions have statutes of limitation generally ranging from three to seven years. We currently have no state income or franchise tax returns under examination. We currently do not file tax returns in any foreign tax jurisdiction other than Canada.
We currently have no positions for which we expect that the amount of unrecognized tax benefit will increase or decrease significantly within twelve months of the reporting date or for which we believe there is significant risk of disallowance upon audit. We have no tax interest or penalties reported in either our statement of operations or statement of financial position for any year reported herein. Management believes it is not more likely than not that the deferred tax assets at December 31, 2017 or December 31, 2016 will not be realized, and as a result a valuation allowance was established against all such deferred tax assets.
Effective January 1, 2017, we adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting. These amendments apply to several aspects of accounting for share-based compensation including the recognition of excess tax benefits and deficiencies and their related presentation in the statement of cash flows as well as accounting for forfeitures. The adoption of ASU No. 2016-09 did not have a significant impact on our financial condition, results of operations or cash flows.
Effective January 1, 2017, we adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities be classified as noncurrent in any classified balance sheet rather than being separated into current and non-current amounts. The adoption of ASU No. 2015-17 did not have a significant impact on our consolidated financial statements.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a $1.9 million reduction in the deferred tax asset and a corresponding reduction in the valuation allowance. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the 2017 financial statements.