Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.2
Income Taxes
12 Months Ended
Aug. 31, 2020
Income Taxes  
Income taxes

Note 13: Income Taxes

Current income taxes are based upon the year’s income taxable for federal and state tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.

Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. The Company’s deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses. These loss carryovers would be limited under the Internal Revenue Code should a significant change in ownership occur within a three-year period.

Significant components of the net deferred tax assets as reflected on the Consolidated Balance Sheets are as follows:

 

 

 

 

 

 

 

 

 

 

August 31, 

 

    

2020

    

2019

Deferred tax liabilities:

 

 

 

 

 

 

Depreciation

 

$

(111,000)

 

$

(122,000)

Software development costs

 

 

(265,000)

 

 

(845,000)

Note receivable

 

 

(1,132,000)

 

 

 —

Total deferred tax liabilities

 

 

(1,508,000)

 

 

(967,000)

 

 

 

  

 

 

  

Deferred tax assets:

 

 

  

 

 

  

Net operating loss carryforward

 

 

9,362,000

 

 

(9,157,000)

Business interest

 

 

3,087,000

 

 

(2,539,000)

Workers’ compensation accruals

 

 

2,202,000

 

 

1,763,000

Stock-based compensation

 

 

759,000

 

 

354,000

Deferred rent

 

 

14,000

 

 

15,000

Total deferred tax assets

 

 

15,424,000

 

 

13,828,000

Valuation allowance

 

 

(13,916,000)

 

 

(12,861,000)

Total net deferred tax assets

 

$

1,508,000

 

$

967,000

Net deferred tax assets

 

$

 —

 

$

 —

 

Income tax expense consists of the following:

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

August 31, 

 

    

2020

    

2019

Current

 

 

  

 

 

  

Federal

 

$

 —

 

$

 —

State

 

 

 —

 

 

 —

Total current

 

 

 —

 

 

 —

Deferred

 

 

  

 

 

  

Federal

 

 

(4,670,000)

 

 

3,162,000

State

 

 

(1,915,000)

 

 

197,000

Total deferred

 

 

(6,584,000)

 

 

3,359,000

Change in valuation allowance

 

$

6,584,000

 

$

(3,359,000)

Total Income Tax Expense (Benefit)

 

$

 —

 

$

 —

 

The reconciliation of the statutory federal rate to the Company’s effective income tax rate is as follows:

 

 

 

 

 

 

 

 

 

    

August 31, 

    

August 31, 

 

 

2020

 

2019

Federal statutory rate (21%)

 

$

19,000,000

 

$

2,673,000

Non-deductible penalties and other permanent differences

 

 

(49,000)

 

 

(430,000)

State taxes (8.84%)

 

 

1,688,000

 

 

1,116,000

Redetermination of prior year taxes

 

 

(184,000)

 

 

 —

Loss on debt extinguishment

 

 

(747,000)

 

 

 —

Preferred option exchange expense

 

 

(13,039,000)

 

 

 —

Loss on inducement

 

 

(453,000)

 

 

 —

Change in fair value of derivative and warrant liability

 

 

368,000

 

 

 —

Change in valuation allowance

 

 

(6,584,000)

 

 

(3,359,000)

Net income tax provision

 

$

 —

 

$

 —

 

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2020, and 2019, the Company had no accrued interest and penalties related to uncertain tax positions.

As of August 31, 2020, and 2019, the Company had cumulative net operating loss carryforwards of approximately $34,115,000 and $30,686,000 respectively, which begin to expire in 2029. The deferred tax assets primarily comprise net operating loss carryforwards and other net temporary deductible differences such as stock-based compensation, deferred rent, depreciation and workers’ compensation accrual. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on management's analysis, they concluded that it was more likely than not that the deferred tax asset would not be realized. Therefore, the Company established a full valuation allowance against the deferred tax assets. The change in the valuation allowance in 2020 and 2019 was approximately $6,584,000 and $3,359,000, respectively.

The Company’s net operating losses (“NOL”) may be limited by the provisions of IRC Section 382, for which the Company has not performed an analysis of the potential limitations. These limitations will be imposed when the Company attains taxable income against which the NOL will be utilized. The company had NOLs of $19,971,000 and $3,843,000 during the periods ending August 31, 2020 and 2019, respectively. These NOLs have an indefinite life but are limited to 80%. As explained above, the Company has determined that it is more likely than not that the Company’s deferred tax assets related to NOL Carryforwards will not be utilized.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID- 19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act would result in a material cash benefit.

The Company is subject to taxation in the U.S. The tax years for 2017 and forward are subject to examination by tax authorities. The Company is not currently under examination by any tax authority.

Management has evaluated tax positions in accordance with FASB ASC 740, and has not identified any tax positions, other than those discussed above, that require disclosure. The Company does not expect a material change to this assessment over the 12 months following August 31, 2020.