Note 11: Income Taxes

12 Months Ended

Dec. 31, 2014

Notes

Note 11: Income Taxes

Note 11:  Income Taxes

The income tax provision of $2,000 and $1,938 for the years ended August 31, 2014 and 2013, respectively, is comprised of a current provision for state income taxes. 

The income tax (provision) benefit differs from the amount computed at federal statutory rates as follows:   

	Four Months Ended December 31,	Years Ended August 31,
	2014	2014	2013
Income tax benefit at federal statutory rate	$         1,281,000	$     2,428,000	$     2,805,000
Stock-based compensation	(66,000)	(287,000)	(335,000)
State income taxes, net of federal benefit	124,000	236,000	272,000
Research and development credit	33,000	99,000	106,000
Valuation allowance	(1,360,000)	(2,480,000)	(2,905,000)
Other	(12,000)	2,000	55,062
	$                     -	$           (2,000)	$           (1,938)

Deferred tax assets (liabilities) are comprised of the following:

	December 31,	August 31,
	2014	2014	2013
Current Asset:
Accruals and reserves	$        73,000	$         62,000	$         26,000
Deferred revenue	18,000	33,000	266,000
Inventories	298,000	90,000	68,000
Valuation allowance	(389,000)	(185,000)	(360,000)
	$                   -	$                   -	$                   -
Long-Term Asset (Liability):
Deferred compensation	$       601,000	$       601,000	$       601,000
Research and development and other tax credits	1,929,000	1,896,000	1,804,000
Net operating loss carryforwards - federal	12,951,000	13,938,000	11,380,000
Net operating loss carryforwards - state	2,079,000	-	-
Depreciation and amortization	39,000	8,000	3,000
Valuation allowance	(17,599,000)	(16,443,000)	(13,788,000)
	$                  -	$                  -	$                  -

The ultimate realization of the deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events.  As of December 31, 2014, we recorded a valuation allowance of $389,000 against current deferred tax assets, and a valuation allowance of $17,599,000 against net long-term deferred tax assets.  The increase in the valuation allowance for the four months ended December 31, 2014 relates primarily to our operating losses.  In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.

In addition to the deferred tax assets listed above, the Company has unrecorded tax benefits of approximately $2,600,000 attributable to the difference between the amount of the financial statement expense and the allowable tax deduction associated with stock-based compensation.  As a result of net operating loss carryforwards, the Company was not able to recognize the excess tax benefits of share-based compensation deductions because the deductions did not reduce income tax payable.  Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to reduce future income and is incorporated into the disclosed amounts of the Company’s net operating loss carryforwards, discussed below.  If subsequently realized, the benefit will be recorded to contributed capital.

As of December 31, 2014, we had a net operating loss carryforward available to offset future taxable income of approximately $40,701,000, which will begin to expire in 2029.  If substantial changes in the Company’s ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward which could be utilized.

We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.  Based upon our review and evaluation, during the four months ended December 31, 2014 and 2013 and the years ended August 31, 2014 and 2013, we concluded the Company had no unrecognized tax benefit that would affect its effective tax rate if recognized.

We classify any interest and penalties arising from the underpayment of income taxes in our statements of comprehensive loss in other income (expense).  As of December 31, 2014, August 31, 2014 and August 31, 2013, we had no accrued interest or penalties related to uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  U.S. federal income tax returns from the year ended August 31, 2011 through the period ended December 31, 2014 are subject to examination.