Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
11. Income Taxes

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” ("U.S. Tax Reform Act"). The U.S. Tax Reform Act provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the U.S. Tax Reform Act became effective during our fiscal year ending September 30, 2018 with all provisions of the U.S. Tax Reform Act effective as of the beginning of our fiscal year ending September 30, 2019. As the U.S. Tax Reform Act was enacted after our year ending September 30, 2017, it had no impact on our fiscal 2017 financial results. The U.S. Tax Reform Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017. Beginning on January 1, 2018, the U.S. Tax Reform Act lowers the US corporate income tax rate to 21% from that date and beyond, as a result, we are utilizing a blended rate of 24.5% for the current year rate for the year ending September 30, 2018, while all of our deferred tax assets and liabilities have been revalued at 21%, the tax rate the Company expects all the deferred tax assets and liabilities to reverse at.


As of September 30, 2018, we have accounted for the relevant parts of the U.S. Tax Reform Act. The following summarizes the key aspects of the accounting required for the U.S. Tax Reform Act:


  · The current year provision is being calculated at a blended statutory rate of 24.5% due to our fiscal year end of September 30. The difference between using the 24.5% and the normal 34% rate is an estimated tax benefit of approximately $0.8 million.


  · Ending balances for all our deferred tax assets and liabilities have been revalued at the Federal statutory tax rate of 21%, which is the rate expected to apply when the deferred taxes reverse. The Company has also accounted for the related impacts to its applicable state tax rates. The overall impact of revaluing the ending deferred taxes at 21% was a reduction to the deferred tax asset balance of $0.8 million as of September 30, 2018, inclusive of the state tax impact. Including the impact of the rate change on the current year calculation noted above, the net impact of the rate change was approximately $41,000 which is reflected in the effective tax rate reconciliation below.
  · The Federal net operating loss (“NOL”) generated for the period ending September 30, 2018, can be carried forward indefinitely. Since the current year NOL has an indefinite carryforward, the Company is able to use its deferred tax liability relating to goodwill (see discussion below) as a source of income for its federal deferred tax position. As a result, the Company also has to released $1.0 million of valuation allowance at September 30, 2018. The remaining net deferred tax liability relates solely to the state deferred tax liability for goodwill. The $1.0 million reduction in the valuation allowance is included in the net change in the valuation allowance on the effective tax rate reconciliation below.


The components of the provision for income taxes is as follows:            
    Year Ended September 30,  
    2018     2017  
Current benefit:            
Federal   $ -       -  
State     (15 )     126  
Total current benefit:   $ (15 )     126  
Deferred benefit:                
Federal   $ (898 )     (5,549 )
State     54       (595 )
Total deferred benefit:   $ (844 )     (6,144 )
Total income tax benefit:   $ (859 )     (6,018 )


A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:
    Year Ended September 30,  
    2018     2017  
Income at US Statutory Rate   $ (2,064 )   $ (2,853 )
State Taxes, net of Federal benefit     (76 )     (633 )
Tax Credits     (176 )     (99 )
Acquisition Related Costs     (108 )     476  
Statutory Rate Changes     41       (571 )
Valuation Allowance     1,167       (2,370 )
Other     357       32  
    $ (859 )   $ (6,018 )


The net deferred income tax asset balance related to the following:            
    Year Ended September 30,  
    2018     2017  
Net Operating Losses   $ 6,710     $ 8,177  
Stock Options     969       881  
Allowance for Doubtful Accounts     140       958  
Accrued & Prepaid Expenses     469       911  
Tax Credit Carryforwards     404       171  
Other     4       -  
Total Deferred tax assets   $ 8,696     $ 11,098  
Intangibles   $ (6,006 )   $ (10,308 )
Depreciation     (31 )     (110 )
Total deferred tax liability   $ (6,037 )   $ (10,418 )
Deferred tax asset   $ 2,659     $ 680  
Valuation allowance     (2,805 )     (1,638 )
Net deferred tax liability   $ (146 )   $ (958 )


As of September 30, 2018, and 2017, the Company had federal and state net operating loss carryforwards of approximately $27.3 million and $23.7 million, respectively, which begin to expire in 2028 for federal and 2022 for state purposes.


Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of September 30, 2018, and 2017, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the net deferred tax assets (deferred tax assets in excess of corresponding deferred tax liabilities) will not be realized. Accordingly, the Company maintained a full valuation allowance as of September 30, 2018 and 2017.


With the passage of time, the Company will continue to generate additional deferred tax assets and liabilities related to amortization of acquired intangible assets for tax purposes. As goodwill, an indefinite-lived intangible asset, will not be amortized for financial reporting purposes under current accounting standards, any tax amortization related goodwill claimed by the Company in future years will give rise to an increasing deferred tax liability, which will only reverse at the time of a future impairment under current accounting rules or ultimate sale of the underlying intangible assets. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income, but for the amount of indefinite federal NOL carryforwards available due to the U.S. Tax Reform Act as noted above, for purposes of determining a valuation allowance against the Company’s other net deferred tax assets. As a result, the Company’s net deferred tax position at September 30, 2018 and 2017, represents the tax impact of the cumulative tax amortization of goodwill, which is primarily attributable to historical tax deductible goodwill from SNI.


Under Internal Revenue Code 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change”. In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us.


The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.


We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of September 30, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.


We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2018, and 2017, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.


The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from September 30, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards form those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.