Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.19.1
INCOME TAXES
 12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
Deferred tax assets and liabilities are provided for significant revenue and expense items recognized in different years for tax and financial reporting purposes. The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible profits. As of December 31, 2018 and 2017, the Company established valuation allowances equal to the full amount of its deferred tax assets, net of certain tax liabilities, due to the uncertainties regarding the realization of the deferred tax assets in future years.
The following table summarizes the significant components of the Company's deferred tax assets and liabilities as of December 31, 2018 and 2017:
 
2018
 
2017
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
1,608

 
$
3,593

Business credit carryforwards
100

 
100

Intangible assets
1,002

 
1,113

Stock-based compensation
4,535

 
575

Inventory reserve
—

 
997

Deferred rent
372

 
299

Other
129

 
127

 
7,746

 
6,804

Deferred tax liabilities:
 
 
 
Property and equipment
(687
)
 
(331
)
CanX intangible assets
(1,064
)
 
(1,074
)
 
(1,751
)
 
(1,405
)
Valuation allowance
(7,060
)
 
(6,474
)
Net deferred tax liabilities
$
(1,065
)
 
$
(1,075
)

The valuation allowance increased by $586 for the year ended December 31, 2018 and decreased by $2,494 for the year ended December 31, 2017.
The Company completed an analysis of incentive stock options outstanding as of December 31, 2018. The analysis determined that certain options do not meet the requirements of IRC Section 422 and, therefore, are treated as non-qualified stock options for income tax purposes. A deferred tax asset, and a related valuation allowance, of $3,538 was recorded for the temporary book/tax differences related to disqualified incentive stock options as of December 31, 2018.
As of December 31, 2018, the Company has federal and California net operating loss (“NOL”) carryforwards of approximately $6,107 and $4,682, respectively, which are available to offset future taxable income. The NOL carryforwards expire from 2033 to 2037. The annual utilization of NOL carryforwards may be limited if a significant ownership change occurs as defined by IRC Section 382. There are no significant limitations on the annual utilization of NOL carryforwards as of December 31, 2018.
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted containing a broad range of tax reform provisions including a reduction in the U.S. corporate tax rate from 34% to 21% beginning in 2018. The Company re-measured its deferred tax assets and liabilities as of December 31, 2017 based on the reduction in the U.S. corporate tax rate. The re-measurement and other immaterial items resulted in a tax benefit of $482 for the year ended December 31, 2017.
A reconciliation of the expected income tax expense (benefit) at the federal statutory rate of 21% for the year ended December 31, 2018 and 34% for the year ended December 31, 2017 and the income tax expense (benefit) reported in the financial statements is as follows:
 
2018
 
2017
 
Amount
 
% of pretax income (loss)
 
Amount
 
% of pretax income (loss)
Income tax expense (benefit) at statutory rate
$
2,120

 
21.0
 %
 
$
(1,829
)
 
(34.0
)%
State taxes
(61
)
 
(0.6
)%
 
(37
)
 
(0.7
)%
Effect of change in future tax rate on deferred tax balances
—

 
—
 %
 
2,226

 
41.4
 %
Stock-based compensation
(2,680
)
 
(26.6
)%
 
685

 
12.7
 %
Change in derivative liability
—

 
—
 %
 
(85
)
 
(1.6
)%
Non-deductible interest on convertible notes
11

 
0.1
 %
 
135

 
2.5
 %
Royalty buyout
—

 
—
 %
 
827

 
15.4
 %
Other permanent differences
117

 
1.2
 %
 
90

 
1.7
 %
Change in valuation allowance
586

 
5.8
 %
 
(2,494
)
 
(46.4
)%
Income tax expense (benefit)
$
93

 
0.9
 %
 
$
(482
)
 
(9.0
)%

The income tax expense (benefit) for the years ended December 31, 2018 and 2017 was comprised of the following:
 
2018
 
2017
Current tax expense before benefit of NOL
$
3,327

 
$
—

Benefit of NOL carryforwards utilized
(3,224
)
 
—

Deferred tax benefit
(10
)
 
(482
)
Income tax expense (benefit)
$
93

 
$
(482
)