Income Taxes

12 Months Ended

Jul. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

11. INCOME TAXES

The Company accounts for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The application of this guidance does not affect the Company’s financial position, results of operations or cash flows for the years ended July 31, 2018 and 2017.

The Company files its tax returns in the U.S. federal jurisdiction, Canada federal jurisdiction and with various U.S. states and the Ontario province of Canada. The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. There are currently no tax audits that have commenced with respect to income tax or any other returns in any jurisdiction. Tax years ranging from 2015 to 2018 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. Because the Company is carrying forward income tax attributes, such as net operating losses and tax credits from 2014 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future. It is the Company’s policy to include income tax interest and penalties expense in its tax provision.

On December 22, 2017, the “Tax Cuts and Jobs Act” (Tax Reform), was signed into law. In addition to changes or limitations to certain tax deductions, the Tax Cuts and Jobs Act permanently lowered the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, the Company reduced the amount of its net deferred tax assets by $2 million, with a corresponding decrease in the valuation allowance, which resulted in no net tax adjustment.

The difference between income taxes at the statutory federal income tax rate of 21% in 2018 and 34% in 2017 and income taxes reported in the consolidated comprehensive statements of operations are attributable to the following (in thousands):

	July 31, 2018			July 31, 2017
Income tax benefit at the federal statutory rate	$	(95	)	$	(166	)
State and local income taxes, net of effect of federal taxes		(20	)		10
Stock-based compensation		-			272
Tax Reform – Reduction in tax rate		2,013			-
Decrease in valuation allowance		(1,898	)		(116	)
Provision for income tax	$	-		$	-

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets consist of the following (in thousands):

	July 31, 2018			July 31, 2017
Federal and State net operating loss	$	4,146		$	5,988
Foreign net operating loss		18			18
Stock-based compensation and other		116			173
		4,281			6,179
Less: Valuation allowance		(4,281	)		(6,179	)
Net deferred tax asset	$	–		$	–

At July 31, 2018, the Company had available Federal and State net operating loss carry forwards of approximately $16.4 million and foreign net operating loss carry forwards of approximately $0.1 million which expire in various years beginning in 2019. The net operating loss carry forwards may be subject to limitation due to change of ownership provisions under section 382 of the Internal Revenue Code and similar state provisions.

A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full $4.3 million valuation allowance at July 31, 2018 ($6.2 million at July 31, 2017) was necessary. The decrease in the valuation allowance for the years ended July 31, 2018 and 2017 were approximately $1.9 million (which includes a reduction of $2 million resulting from the change in federal tax rate from Tax Reform) and $116,000, respectively. The Company paid no taxes for the years 2018 or 2017.