Income Taxes

6 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

For the three and six months ended December 31, 2019 and 2018, the Company recorded an income tax expense (benefit), as follows:

	For the three months ended						For the six months ended
	December 31,						December 31,
	2019			2018			2019			2018
Income tax benefit	$	(1,255,000	)	$	(228,000	)	$	(1,770,000	)	$	(655,000	)
Income tax benefit - Solsys Acquisition		-			-			(4,085,000	)		-
Valuation allowance on deferred tax assets		1,255,000			228,000			1,770,000			655,000
Net income tax benefit	$	-		$	-		$	(4,085,000	)	$	-

For the six months ended December 31, 2019 and 2018, the Company recorded an income tax expense (benefit) of $4.1 million and $0, respectively. For the six months ended December 31, 2019 and 2018, the effective rate of 55% and 0% varied from the U.S. federal statutory rate primarily due to the recording of a full valuation allowance on the deferred tax assets, and the business combination related to the Solsys Acquisition.

The acquisition of Solsys resulted in the recognition of deferred tax liabilities of approximately $4.1 million, related primarily to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its deferred tax assets. The deferred tax liabilities generated from the business combination is netted against the Company's pre-existing deferred tax assets. Consequently, this resulted in a release of $4.1 million of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit.

Valuation Allowance on Deferred Tax Assets

Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income.

In accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. The guidance requires entities to evaluate all available positive and negative evidence, including cumulative results in recent periods, weighted based on its objectivity, in determining whether its deferred tax assets are more likely than not realizable.

The Company regularly assesses its ability to realize its deferred tax assets. The Company is in a three-year cumulative loss position at June 30, 2019, and it expects to be in a cumulative pretax loss position as of June 30, 2020. Management evaluated available positive evidence, including the continued growth of the Company's revenues and gross profit margins, the completion of the development of its next generation Nexus product, its SonaStar technology license to its Chinese partner and the reduction in investigative and professional fees, along with available negative evidence, including the Company's continuing investment in building a direct sales force and payment of transaction fees for the Company's Solsys Acquisition. After weighing both the positive and negative evidence, management concluded that the Company's deferred tax assets are not more likely-than-not realizable. Accordingly, the Company recorded an increase in the valuation allowance for the three months ended December 31, 2019 of approximately $1.3 million against its remaining deferred tax assets at December 31, 2019. As a result of the Solsys Acquisition, the Company recorded a valuation allowance release of approximately $4.1 million. The remaining cumulative valuation allowance at December 31, 2019 is approximately $3.1 million. The Company will continue to assess its ability to utilize its net operating loss carryforwards, and will reverse this valuation allowance when sufficient evidence is achieved to allow the realizability of such deferred tax assets.

As of December 31, 2019 and June 30, 2019, the Company had no material unrecognized tax benefits or accrued interest and penalties.