Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
12 Months Ended
Jul. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

Note 8—Income Taxes

 

The FASB topic on income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For the benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company has had no unrecognized tax benefits.

 

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company has not recognized any interest and/or penalties in the accompanying consolidated statements of operations for the years ended July 31, 2017 and 2016.

 

The Company is subject to taxation in the United States, various states and in Australia. The Company’s tax years for 2008 and forward and 2011 and forward are subject to examination by the United States federal tax authorities and California tax authorities, respectively, due to the carry forward of unutilized net operating losses and research and development tax credits.

 

At July 31, 2017, the Company had federal and California income tax net operating loss carryforwards of approximately $77.6 million and $72.5 million, respectively. In addition, the Company has federal and California research and development tax credit carryforwards of approximately $1.2 million and $1.3 million, respectively. The Company also has California Hiring Credits of approximately $9,300. The federal net operating loss and research and development tax credit carryforwards and California net operating loss carryforwards will begin to expire in 2027 unless previously utilized. The California research and development tax credit carryforwards will carry forward indefinitely until utilized. The Company has foreign net operating loss carryforwards in Australia of $0.6 million. The Company has not completed a study to assess whether one or more ownership changes, as defined by Section 382/383 of the Internal Revenue Code of 1986, as amended (the “Code”), have occurred since the Company’s formation, due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. Based on a preliminary assessment, the Company believes that ownership changes have occurred. The Company estimates that if such an ownership change has occurred, the federal and state net operating loss carry-forwards and research and development tax credits that can be utilized in the future will be significantly limited. The Company may never be able to realize the benefit of some or all of the federal or state net operating loss carryforwards or research and development tax credit carryforwards, either due to ongoing operating losses or due to ownership changes, which limits the usefulness of the loss carryforwards.

 

Significant components of the Company’s deferred tax assets as of July 31, 2017 and 2016 are as follows:

 

    2017     2016  
Net operating loss carryforwards   $ 30,237,000     $ 23,568,000  
Credits     2,004,000       1,440,000  
Start-up costs     46,000       51,000  
Accumulated depreciation     170,000       341,000  
Option and stock awards     4,886,000       3,347,000  
Other     686,000       503,000  
Net deferred tax assets     38,029,000       29,250,000  
Valuation allowance for deferred tax assets     (38,029,000 )     (29,250,000 )
Net deferred taxes   $ -     $ -  

 

A valuation allowance of $38.0 million and $29.3 million at July 31, 2017 and 2016, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. The valuation allowance increased by $8.8M and $10.4M for the years ended July 31, 2017 and 2016, respectively.

 

A reconciliation of income taxes using the statutory income tax rate, compared to the effective rate, is as follows:

 

    2017     2016  
Federal tax benefit at the expected statutory rate     34.00 %     34.00 %
State income tax, net of federal tax benefit     0.00 %     0.00 %
Non-deductible expenses     (0.94 )%     (2.21 )%
Change in valuation allowance     (33.74 )%     (32.83 )%
Other     0.67 %     1.03 %
Income tax benefit - effective rate     (0.01 )%     (0.01 )%