Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.1
Income Taxes
12 Months Ended
Feb. 03, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES

Note 5 – Income Taxes

 

On December 22, 2017, the Federal government of the United States enacted the U.S. Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed existing U.S. tax laws including a reduction in the federal corporate income tax rate from 35% to 21%, repeal of the corporate alternative minimum tax (“AMT”) and refund certain existing AMT credits over several years, introduction of a capital investment deduction, limitation of the interest deduction, limitation of the use of net operating losses incurred on or after January 1, 2018 to offset future taxable income, limitation of the deduction for compensation paid to certain executive officers and extensive changes to the U.S. international tax system, as well as other changes. These changes generally took effect on January 1, 2018. The Company’s federal net operating losses that have been incurred prior to December 31, 2017 will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. Net operating losses incurred after December 31, 2017 will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act, SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, the Company has finalized the income tax effects of the Tax Act as of February 3, 2019 and had no change to its original estimates.

  

The components of deferred income taxes follow:

 

    2019     2018  
             
Deferred Income Tax Assets            
Federal net operating loss carryforward   $ 708,865     $ 9,211,499  
State net operating loss carryforward     130,924       2,130,112  
Intangible assets     248,731       318,158  
Accrued liabilities     1,139,686       515,392  
Equity based compensation     171,120       38,807  
Property and equipment     1,165,359       985,871  
Merchandise inventories     154,599       63,415  
Total Deferred Income Tax Assets     3,719,284       13,263,254  
Valuation Allowance     (3,719,284 )     (13,263,254 )
Net Deferred Income Tax Asset   $ -     $ -  
                 

 

The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pretax income as follows:

 

    2019     2018  
(Benefit) at Federal Statutory rates   $ (1,397,881 )   $ (1,861,772 )
Permanent adjustments     406,674       62,491  
State tax, net of Federal benefit     (15,086 )     (265,277 )
Change in Federal rate from 34% to 21%     -       6,658,540  
Federal True-ups     (175,845 )     (403,322 )
Uncertain tax positions – NOLS     10,753,384       -  
Change in valuation allowance     (9,554,839 )     (4,164,660 )
Income tax provision   $ 16,407     $ 26,000  

   

The Company is subject to federal, state and local corporate income taxes. The components of the provision for income taxes reflected on the consolidated statements of operations are set forth below:

 

    2019     2018  
Current taxes:            
U.S. federal   $ -     $ -  
State and local     16,407       26,000  
Total current tax expense (benefit)   $ 16,407     $ 26,000  
                 
Deferred taxes:                
U.S. federal   $ -     $ -  
State and local     -       -  
Total deferred tax expense (benefit)     -       -  
Total tax (benefit) provision   $ 16,407     $ 26,000  

 

Differences in terms of percentages are as follows:

 

    2019     2018  
(Benefit) at Federal Statutory rates     (21.0 %)     (34.0 %)
Permanent adjustments     6.1 %     1.1 %
State tax, net of Federal benefit     (0.2 %)     (4.8 %)
Change in Federal rate from 34% to 21%     -       121.6 %
Federal True-ups     (2.6 %)     (7.3 %)
Uncertain tax positions- NOLS     161.5 %     -  
Change in valuation allowance     (143.5 %)     (76.1 %)
Income tax (benefit) provision     0.3 %     0.5 %

  

At February 3, 2019 and February 4, 2018, pending the determination of the IRS that the NOLs of SAC were effectively inherited by the Company in the 2017 reorganization, the Company has net operating loss carryforwards available for federal income tax purposes of approximately $45,190,000 and $43,864,000, respectively, which are scheduled to expire in varying amounts from fiscal 2027 to fiscal 2037. In addition, the Company has approximately $35,674,000 and $35,908,000 of state net operating loss carryforwards as of February 3, 2019 and February 4, 2018, respectively. An allowance has been recorded against the net operating losses in accordance with ASC 740-10. The federal and state net operating loss net of reserves are $3,376,000 and $2,334,000 respectively for fiscal year ended February 3, 2019.

 

As defined in Section 382 of the Internal Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses. As a result of issuance, sales and other transactions involving the Company’s stock, the Company experienced an ownership change during fiscal year ended February 3, 2019 which could cause such federal net operating losses to be subject to limitation under Section 382. There is no impact on the overall provision in the event the federal net operating losses are limited since the Company has a full valuation allowance against its deferred tax assets.

 

The Company is currently working with the IRS to resolve an administrative issue related to the amount and nature of its NOLs. The Company has consistently maintained a full valuation allowance against its NOLs. Accordingly, the resolution of the uncertain tax position regarding the Company’s NOL carryforward will have no impact on the Company’s financial position or results of operations.

 

During fiscal years ended February 3, 2019 and February 4, 2018, the Company increased/(decreased) the valuation allowance by approximately ($9,555,000) and ($4,165,000) respectively.

 

The changes in the amount of unrecognized tax benefits in 2019 and 2018 were as follows:

 

    2019     2018  
Beginning balance   $ -     $ -  
Additions for tax positions acquired     -       -  
Additions for tax positions related to current year     10,753,384       -  
                 
Tax positions of prior years:                
Payments     -       -  
Settlements     -       -  
Due to lapsed SOL     -       -  
Ending balance   $ 10,753,384     $ -  

  

The Company adopted FASB ASU 2013-11. The pronouncement requires the Company to offset its uncertain tax positions against certain deferred tax assets in the same jurisdiction. As of February 3, 2019, the Company reclassified $10,753,384 of its uncertain tax positions against its related deferred tax assets.