INCOME TAXES
The Company records income taxes using the liability method. Under this method, deferred tax assets and liabilities are computed for the expected future impact of temporary differences between the financial statement and income tax bases of assets and liabilities using current income tax rates and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. ASC 740 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold before a benefit is recognized in the financial statements.
At December 31, 2017, the Company had $321,066,413 of cumulative net operating loss carryforwards for federal income tax purposes that were available to offset future taxable income through the year 2037. Under the Internal Revenue Code, the future utilization of net operating losses may be limited in certain circumstances where there is a significant ownership change. The Company prepared an analysis for the year ended December 31, 2012 and determined that a significant change in ownership has occurred as a result of the cumulative effect of the sales of common stock through its offerings. Such change limited the Company's utilizable net operating loss carryforwards to $234,024,680 for the year ended December 31, 2017. Available net operating loss carryforwards may be further limited in the event of another significant ownership change.
Deferred income taxes reflect an estimate of the cumulative temporary differences recognized for financial reporting purposes from that recognized for income tax reporting purposes. At December 31, 2017 and 2016, the components of these temporary differences and the deferred tax asset were as follows:
|
| | | | | | | | |
| | As of December 31 |
| | 2017 | | 2016 |
Deferred Tax Asset | | | | |
Current: | | | | |
Accrued Expenses | | $ | — |
| | $ | 192,000 |
|
Inventory Allowance | | 141,000 |
| | 234,000 |
|
Other | | 13,000 |
| | 43,000 |
|
Total Current | | 154,000 |
| | 469,000 |
|
Non-current: | | | | |
Stock Based Compensation-Stock Options and Restricted Stock | | 1,058,000 |
| | 1,919,000 |
|
Tax effect of NOL carryforward | | 67,852,000 |
| | 79,384,000 |
|
Depreciation | | 8,748,000 |
| | 17,406,000 |
|
Amortization | | (368,000 | ) | | (637,000 | ) |
Warranty reserve | | 14,000 |
| | 68,000 |
|
Total Non-current | | 77,304,000 |
| | 98,140,000 |
|
Net deferred tax asset | | 77,458,000 |
| | 98,609,000 |
|
Less valuation allowance | | (77,458,000 | ) | | (98,609,000 | ) |
Net deferred tax asset | | $ | — |
| | $ | — |
|
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 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. Based upon the level of historical losses and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is not "more-likely-than-not" that the Company will realize the benefits of these deductible differences at December 31, 2017. The Company’s deferred tax valuation allowance of $77,458,000 reflected above is a decrease of $21,151,000 from the valuation allowance reflected as of December 31, 2016 of $98,609,000.
As of December 31, 2017, the Company has not recorded a liability for uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax (benefit)/expense. No interest and penalties related to uncertain tax positions were accrued at December 31, 2017.
The Company’s effective tax rate for the years ended December 31, 2017 and 2016 differs from the statutory rate due to the following (expressed as a percentage of pre-tax income):
|
| | | | | | |
| | 2017 | | 2016 |
Federal statutory rate | | 35.0 | % | | 35.0 | % |
State statutory rate | | 2.8 | % | | 2.6 | % |
Change in rate | | — | % | | (0.4 | )% |
Permanent tax differences | | (2.3 | )% | | (0.1 | )% |
Change in fair value of derivatives | | 8.4 | % | | 0.9 | % |
Deemed interest expense on debt discount | | (5.5 | )% | | (5.1 | )% |
Loss on extinguishment of liabilities | | (4.9 | )% | | (5.9 | )% |
Other | | (0.9 | )% | | (1.8 | )% |
Increase in valuation allowance | | (32.6 | )% | | (25.6 | )% |
| | — | % | | — | % |