Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
12 Months Ended
Jul. 31, 2018
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 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 statement of operations for the year ended July 31, 2018 and 2017.

 

The Company is subject to taxation in the United States, various states and in Australia. The Company’s tax years for 2009 and forward and 2012 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 credits.

 

At July 31, 2018, the Company had federal and California income tax net operating loss carryforwards of approximately $103.1 million and $98.1 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, research tax credit carryforwards and California net operating loss carryforwards will begin to expire in 2028 unless previously utilized. The California research and development 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 IRC 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 had 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 and state net 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, 2018 and 2017 are listed below:

 

    2018     2017  
Net operating loss carryforwards   $ 28,313,000     $ 30,237,000  
Credits     2,408,000       2,004,000  
Start-up costs     24,000       46,000  
Accumulated depreciation     162,000       170,000  
Option and stock awards     5,703,000       4,886,000  
Other     591,000       686,000  
Net deferred tax assets     37,201,000       38,029,000  
Valuation allowance for deferred tax assets     (37,201,000 )     (38,029,000 )
Net deferred taxes   $ -       -  

 

A valuation allowance of $37.2 million and $38.0 million at July 31, 2018 and 2017, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. The valuation allowance decreased by $0.8 million and increased by $8.8 million for the years ended July 31, 2018 and 2017, respectively.

 

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

 

    2018     2017  
Federal tax benefit at the expected statutory rate     26.47 %     34.00 %
State income tax, net of federal tax benefit     0.00 %     0.00 %
Non-deductible expenses     (2.53 )%     (0.94 )%
Impact of federal rate change     -32.14 %     - %
Impact of rate change on valuation allowance     32.14 %     - %
Change in valuation allowance     (24.72 )%     (33.74 )%
Other     0.78 %     0.67 %
Income tax benefit - effective rate     (0.00 )%     (0.01 )%