XML 54 R16.htm IDEA: XBRL DOCUMENT

Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 10. INCOME TAXES

The components of income tax provision (benefit) for the years ended December 31, 2019 and 2018 are as follows:

			2019				2018
Current taxes:
Federal		$	—			$	—
State			—				—

Total current taxes			—				—
Deferred tax provision (benefit)			—				—

Income tax provision (benefit)		$	—			$	—

A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2019 and 2018 to the Company’s effective tax rate is as follows:

		2019				2018
U.S. Statutory tax rate			21.0	%			21.0	%
State taxes, net of Federal benefit			5.1	%			5.1	%
Federal Research and development tax credits			—	%			—	%
Stock based compensation			(2.6	)%			(3.0	)%
Revaluation of deferred tax assets based on changes in enacted tax laws			—	%			—	%
Change in valuation reserve on deferred tax assets			(22.4	)%			(22.1	)%
Other, net			(1.1	)%			(1.0	)%

Income tax (provision) benefit			—	%			—	%

Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2019 and 2018 are as follows:

		2019				2018
Deferred tax assets:
Stock-based compensation		$	605,000			$	650,000
Start-up costs			115,000				115,000
Inventory reserves			1,080,000				860,000
Uniform capitalization of inventory costs			85,000				90,000
Allowance for doubtful accounts receivable			90,000				45,000
Equipment depreciation			240,000				140,000
Deferred revenue			915,000				975,000
Debt and PIA obligations carried at fair value			1,045,000				225,000
Accrued expenses			110,000				385,000
Net operating loss carryforward			17,515,000				16,080,000
Research and development tax credit carryforward			1,795,000				1,795,000
State jobs credit carryforward			230,000				230,000
Charitable contributions carryforward			55,000				50,000

Total deferred tax assets			23,880,000				21,640,000
Valuation reserve			(23,740,000	)			(21,500,000	)

Total deferred tax assets			140,000				140,000
Domestic international sales company			(140,000	)			(140,000	)
Total deferred tax liabilities			(140,000	)			(140,000	)

Net deferred tax assets (liability)		$	—			$	—

The valuation allowance on deferred tax assets totaled $23,740,000 and $21,500,000 as of December 31, 2019 and 2018, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018. Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years starting in 2018 will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable.

The Company has incurred operating losses in 2019 and 2018 and it continues to be in a three-year cumulative loss position at December 31, 2019 and 2018. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to increase our valuation allowance by $2,240,000 to continue to fully reserve its deferred tax assets at December 31, 2019. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

At December 31, 2019, the Company had available approximately $67,100,000 of Federal net operating loss carryforwards available to offset future taxable income generated. Such tax net operating loss carryforwards expire between 2026 and 2039. In addition, the Company had research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2019, which expire between 2023 and 2037.

The Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the Company indicate that due to ownership changes which have occurred, approximately $765,000 of its net operating loss and $175,000 of its research and development tax credit carryforwards are currently subject to an annual limitation of approximately $1,151,000, but may be further limited by additional ownership changes which may occur in the future. As stated above, the net operating loss and research and development credit carryforwards expire between 2023 and 2038, allowing the Company to potentially utilize all of the limited net operating loss carry-forwards during the carryforward period.

As discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the consolidated financial statements.

The effective tax rate for the years ended December 31, 2019 and 2018 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2019 primarily because of the current year operating losses.

The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2015 and all prior tax years.